Türkiye İş Bankası Anonim Şirketi and Its Subsidiaries

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2 Türkiye İş Bankası Anonim Şirketi and Its Subsidiaries TABLE OF CONTENTS Independent auditors report Page Consolidated statement of financial position 1-2 Consolidated statement of income 3 Consolidated statement of profit or loss and other comprehensive income 4 Consolidated statement of changes in equity 5-6 Consolidated statement of cash flows 7-8 Notes to the consolidated financial statements 9-128

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5 CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2014 Assets Note 31 December December 2013 Cash and cash equivalents 7 2,531,902 2,194,664 Balances with central bank 8 22,557,364 21,152,651 Loans and advances to banks 9 6,504,828 5,572,863 Financial assets at fair value through profit or loss 2,267,013 2,913,514 - Trading investment securities 10 1,185,942 1,624,680 - Derivative financial instruments 45 1,081,071 1,288,834 Derivative assets held for risk management 45 84, Loans and advances to customers ,346, ,863,072 Trade receivables 12 2,001,207 2,125,711 Insurance receivables 14 1,630,744 1,510,112 Inventories 13 1,551,889 1,341,893 Investment securities 47,068,631 42,026,239 - Available for sale investment securities 10 45,676,771 34,297,792 - Held to maturity investment securities 10 1,391,860 7,728,447 Current tax assets 27 35,946 27,235 Investments in equity-accounted investees , ,989 Property, plant and equipment 16 7,853,098 7,928,327 Investment properties 18 1,117,023 1,064,261 Intangible assets and goodwill , ,778 Non-current assets held for sale 19 72, ,566 Deferred tax assets 27 1,057, ,555 Other assets 20 3,029,086 3,417,260 Total assets 271,247, ,660,690 The accompanying notes form an integral part of these consolidated financial statements. 1

6 CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2014 Liabilities and equity Note 31 December December 2013 Deposits ,836, ,001,979 - Deposits from banks 21 6,689,292 4,192,301 - Deposits from customers ,147, ,809,678 Obligations under repurchase agreements 22 20,011,731 22,595,899 Derivative financial instruments ,841 1,197,345 Derivative liabilities held for risk management ,155 Funds borrowed 23 36,617,271 29,517,506 Debt securities issued 24 19,731,592 11,120,911 Payables to stock exchange money market 25 2,291,363 2,403,976 Trade payables 26 2,374,759 2,474,550 Taxes and dues payable , ,425 Employee benefits 29 2,755,540 2,533,654 Corporate tax liability , ,640 Insurance contract liabilities 14 5,894,351 5,299,483 Provisions 28 1,228,466 1,366,673 Deferred tax liabilities 27 13,979 21,016 Liabilities held for sale ,155 Other liabilities 30 7,956,823 8,363,308 Subordinated liabilities 31 3,384,849 3,090,902 Total liabilities 235,711, ,536,577 Share capital 32 6,115,938 6,115,938 Share premium 32 38,435 38,434 Legal reserves 32 2,912,743 2,657,122 Fair value reserve ,524 (799,363) Hedging reserve 6,313 (461) Translation reserve 32 (222,840) 361,631 Other reserve 7,017 7,017 Actuarial gain/(loss) (19,359) 29,133 Retained earnings 18,389,047 15,437,453 Total equity attributable to equity holders of the Bank 28,002,818 23,846,904 Non-controlling interest 7,533,841 6,277,209 Total equity 35,536,659 30,124,113 Total liabilities and equity 271,247, ,660,690 Commitment and contingencies 45 87,495,717 81,487,452 The accompanying notes form an integral part of these consolidated financial statements. 2

7 CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED 31 DECEMBER 2014 Note Interest income on loans 13,279,278 10,857,188 Interest income on securities 3,943,001 3,554,389 Interest income on deposits at banks 207, ,288 Interest income on finance leases 184, ,826 Interest income on factoring transactions 82,009 53,141 Other interest income 92,359 64,117 Total interest income 17,788,972 14,815,949 Interest expense on deposits (5,546,777) (4,752,326) Interest expense on borrowings (931,114) (680,531) Interest expense on interbank borrowings (1,762,275) (1,165,665) Interest expense on debt securities issued (1,115,504) (595,336) Other interest expense (71,433) (92,474) Total interest expense (9,427,103) (7,286,332) Net interest income 8,361,869 7,529,617 Fee and commission income 33 2,424,903 2,400,349 Fee and commission expense 33 (920,143) (919,399) Net fee and commission income 33 1,504,760 1,480,950 Securities trading income, net 878, ,027 Derivative trading expense, net (614,743) (500,764) Income from manufacturing operations 34 6,873,732 5,954,187 Income from insurance operations 35 3,512,906 3,184,098 Income from other operations , ,756 Cost of manufacturing operations 37 (4,980,249) (4,458,778) Cost of insurance operations 38 (2,795,791) (2,433,496) Cost of other operations 40 (707,122) (740,269) Other operating income , ,215 Other operating expenses 39 (7,538,721) (6,991,576) Foreign exchange gains, net 595, ,248 Impairment losses on financial assets, net 41 (771,923) (374,133) Dividend income 21,186 27,847 Share of income from equity-accounted investees 15 36,565 8,982 Profit before income tax 5,613,899 5,284,911 Income tax expense 27 (1,042,793) (892,130) Profit for the year 4,571,106 4,392,781 Profit attributable to: Equity holders of the Bank 3,759,857 3,688,645 Non-controlling interest 811, ,136 Profit for the year 4,571,106 4,392,781 Basic and diluted earnings per share (Full TL) The accompanying notes form an integral part of these consolidated financial statements. 3

8 CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2014 Profit for the year 4,571,106 4,392,781 Other comprehensive income Items that will never be reclassified to profit or loss: Remeasurements of defined benefit liability, net of tax (49,419) 29,218 (49,419) 29,218 Items that are or may be reclassified to profit or loss: Change in unrealised gains/(losses) on available for sale investments 1,817,516 (2,067,903) Income tax relating to components of other comprehensive income (309,604) 330,154 Net gains/(losses) on available for sale assets transferred to the income statement on disposal 179,228 (46,915) Foreign currency translation differences (367,612) 193,406 Cash flow hedges- effective portion of changes in fair value 6,774 (461) Change in other reserves ,326,302 (1,591,403) Other comprehensive income/(expenses), net of tax 1,276,883 (1,562,185) Total comprehensive income for the year 5,847,989 2,830,596 Attributable to Equity holders of the Bank 4,708,555 2,198,995 Non-controlling interest 1,139, ,601 Total comprehensive income for the year 5,847,989 2,830,596 The accompanying notes form an integral part of these consolidated financial statements. 4

9 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2014 Share capital Share premium Legal reserves Attributable to equity holders of the Bank Fair value reserve Hedging Translation reserve reserve Other reserve Actuarial gain/(loss) Retained earnings Total Noncontrolling interest Total Equity Balance at 1 January ,115,938 38,434 2,657,122 (799,363) (461) 361,631 7,017 29,133 15,437,453 23,846,904 6,277,209 30,124,113 Total comprehensive income for the year Net profit for the year ,759,857 3,759, ,249 4,571,106 Other comprehensive income, net of tax Change in unrealised losses on available for sale investments ,395, ,395, ,202 1,507,912 Net gains on available for sale assets transferred to the income statement on disposal , , ,228 Cash flow hedges effective portion of changes in fair value , , ,774 Foreign currency translation differences for foreign operations (584,471) (584,471) 216,859 (367,612) Net change in actuarial gain related to employee benefits (48,492) -- (48,492) (927) (49,419) Total other comprehensive income/(expense) ,574,887 6,774 (584,471) -- (48,492) , ,185 1,276,883 Total comprehensive income/(expense) for the year ,574,887 6,774 (584,471) -- (48,492) 3,759,857 4,708,555 1,139,434 5,847,989 Contributions and distributions Dividend distribution (649,410) (649,410) (136,242) (785,652) Transfer to legal reserves , (255,267) Other (*) ,431 96, ,000 Total contributions and distributions , (808,246) (552,979) (135,673) (688,652) Changes in ownership interests Changes in non-controlling interests without a change in control (17) , ,209 Total transactions with owners , (808,263) (552,641) 117,198 (435,443) Balance at 31 December ,115,938 38,435 2,912, ,524 6,313 (222,840) 7,017 (19,359) 18,389,047 28,002,818 7,533,841 35,536,659 (*) According to the Articles of Incorporation of the Bank, a portion of the net profit for the period is distributed to the employees as a dividend. Provision recognized in 2013 for dividends to be distributed to employees within the scope of IAS 19 Employee Benefits has been added to distributable profit. The accompanying notes form an integral part of these consolidated financial statements. 5

10 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2014 Share capital Share premium Legal reserves Fair value reserve Attributable to equity holders of the Bank Hedging reserve Translation reserve Other reserve Actuarial gain/(loss) Retained earnings Total Noncontrolling interest Total Equity Balance at 1 January ,115, ,434 2,364, , ,802 6, ,588,942 22,305,152 5,687,458 27,992,610 Total comprehensive income for the year Income for the period ,688,645 3,688, ,136 4,392,781 Other comprehensive income, net of tax Change in unrealised losses on available for sale investments (1,702,111) (1,702,111) (35,638) (1,737,749) Net gains on available for sale assets transferred to the income statement on disposal (47,356) (47,356) 441 (46,915) Change in other reserves Cash flow hedges effective portion of changes in fair value (461) (461) -- (461) Foreign currency translation differences for foreign operations , ,829 (37,423) 193,406 Net change in actuarial gain related to employee benefits , , ,218 Total other comprehensive income/(expense) (1,749,467) (461) 230, , (1,489,650) (72,535) (1,562,185) Total comprehensive income/(expense) for the year (1,749,467) (461) 230, ,133 3,688,645 2,198, ,601 2,830,596 Contributions and distributions Dividend distribution (796,618) (796,618) (127,885) (924,503) Transfer to legal reserves , (292,891) Other (*) , , ,931 Total contributions and distributions , (950,578) (657,687) (127,885) (785,572) Changes in ownership interests Changes in share premium -- (110,444) , Acquisition of subsidiary with non-controlling interests ,186 15,186 Changes in non-controlling interests without a change in control ,849 71,293 Total transactions with owners -- (110,000) 292, (840,134) (657,243) (41,850) (699,093) Balance at 31 December ,115,938 38,434 2,657,122 (799,363) (461) 361,631 7,017 29,133 15,437,453 23,846,904 6,277,209 30,124,113 (*) According to the Articles of Incorporation of the Bank, a portion of the net profit for the period is distributed to the employees as a dividend. Provision recognized in 2012 for dividends to be distributed to employees within the scope of IAS 19 Employee Benefits has been added to distributable profit. The accompanying notes form an integral part of these consolidated financial statements. 6

11 CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2014 Note Cash flows from operating activities: Profit for the year 4,571,106 4,392,781 Adjustments for: Depreciation and amortization 1,063, ,719 Net interest income (8,361,869) (7,529,617) Income tax expense 27 1,042, ,130 Impairment losses on financial assets , ,133 Increase in provision for employee benefits ,104 95,932 Unearned premium reserve 14 70, ,551 Provision for outstanding claims , ,334 Life mathematical provisions 35, 38 (13,878) 2,334 Other provision expenses 28 (137,074) 174,257 Share of income from equity accounted investees 15 (36,565) (8,982) Allowance for doubtful trade receivables 12 13,560 8,460 Allowance for doubtful insurance receivables 14 8,753 15,171 Provisions for /(reversal of) impairment losses on inventory 13 4,526 (1,817) Reversal of impairment losses on property, plant and equipment (68,459) (15,728) Gain on sale of property, plant and equipment 36 (69,997) (249,492) Gain on sale of equity accounted investees -- (72,634) (584,131) (523,468) Change in trading assets 107,920 (293,197) Change in reserve deposits (1,715,016) (3,737,268) Change in loans and advances to banks (144,866) (181,497) Change in loans and advances to customers (24,382,339) (30,372,844) Change in trade receivables 110,944 (478,399) Change in insurance receivables (129,385) (252,064) Change in inventories (214,522) (87,272) Change in other assets 1,046, ,957 Change in deposits from banks 2,495, ,267 Change in deposits from customers 9,360,534 14,440,195 Change in obligations under repurchase agreements (2,584,555) 7,777,425 Change in trade payables (91,547) 1,176,453 Change in other liabilities and provisions 280,524 (231,066) (16,444,246) (11,093,778) Interest received 16,919,218 13,953,184 Interest paid (9,386,813) (7,154,685) Income taxes paid (1,421,876) (1,059,925) Net cash (used in) operating activities (10,333,717) (5,355,204) Cash flows from investing activities: Dividends received 21,186 27,847 Acquisition of subsidiary, net of cash acquired ,036 Acquisition of equity accounted investees (17,209) -- Acquisition of property, plant and equipment 16 (1,539,844) (1,965,792) Acquisition of intangible assets 17 (273,914) (254,414) Acquisition of investment properties 18 (233,457) (202,853) Proceeds from sale of subsidiary 47, Proceeds from sale of equity participations ,500 Proceeds from the sale of property, plant and equipment 457, ,310 Acquisition of investment securities (22,645,452) (14,609,607) Proceeds from sale of investment securities 20,291,672 13,985,700 Net cash (used in) investing activities (3,892,518) (2,320,273) The accompanying notes form an integral part of these consolidated financial statements. 7

12 CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2014 Note Cash flows from financing activities: Proceeds from issue of debt securities 21,650,955 15,180,162 Repayments of debt securities (12,376,321) (8,575,676) Repayments of funds borrowed (3,048,320) (4,449,264) Proceeds from funds borrowed 9,045,900 9,799,237 Changes in non-controlling interest 252,871 86,035 Dividends paid (785,652) (924,503) Net cash from financing activities 14,739,433 11,115,991 Net increase/(decrease) in cash and cash equivalents 513,198 3,440,514 Effects of foreign exchange rate fluctuations on cash and cash equivalents 297, ,816 Cash and cash equivalents at 1 January 7 13,074,103 8,869,773 Cash and cash equivalents at 31 December 7 13,884,443 13,074,103 The accompanying notes form an integral part of these consolidated financial statements. 8

13 Notes to the consolidated financial statements Pages Note 1 Activities of the Bank and the Group Note 2 Basis of preparation Note 3 Significant accounting policies Note 4 Financial risk management Note 5 Management of insurance risk Note 6 Business combinations 76 Note 7 Cash and cash equivalents 77 Note 8 Balances with central bank 77 Note 9 Loans and advances to banks 78 Note 10 Securities portfolio Note 11 Loans and advances to customers Note 12 Trade receivables Note 13 Inventories 85 Note 14 Insurance receivables and insurance contract liabilities Note 15 Equity accounted investees Note 16 Property, plant and equipment Note 17 Intangible assets and goodwill Note 18 Investment properties 94 Note 19 Non-current assets held for sale 95 Note 20 Other assets 95 Note 21 Deposits 96 Note 22 Obligations under repurchase agreements 96 Note 23 Funds borrowed Note 24 Debt securities issued 99 Note 25 Payables to Stock Exchange Money Market 99 Note 26 Trade payables 99 Note 27 Taxation Note 28 Provisions 106 Note 29 Employee benefits Note 30 Other liabilities 110 Note 31 Subordinated liabilities 111 Note 32 Capital and reserves Note 33 Net fee and commission income 113 Note 34 Income from manufacturing operations 113 Note 35 Income from insurance operations 114 Note 36 Other operating income 114 Note 37 Cost of manufacturing operations 114 Note 38 Cost of insurance operations 114 Note 39 Other operating expenses 115 Note 40 Income and cost from other operations 115 Note 41 Impairment losses on financial assets, net 116 Note 42 Segment reporting Note 43 Earnings per share 122 Note 44 Related parties 122 Note 45 Commitment and contingencies Note 46 Ratings Note 47 Events after the reporting period 128 9

14 1. Activities of the Bank and the Group Türkiye İş Bankası Anonim Şirketi ( the Bank ) was incorporated in Turkey in The Bank provides private, retail, commercial and corporate banking, money market and securities market operations as well as international banking services. The Bank now operates a nationwide network of 1,333 (31 December 2013: 1,289) branches, 6,290 ATMs (31 December 2013: 5,673 ATMs), foreign branches in England (London-Edmonton), Bahrain, Iraq (Erbil-Bagdad), Georgia (Batumi-Tiflis), Kosovo (Pristine, Prizren) and 16 branches in the Turkish Republic of Northern Cyprus and two banking subsidiaries in Germany and Russia. The Bank directly invests in equity participations of 25 companies operating mainly in industry and the financial sector. Address : İş Kuleleri, 34330, Levent / İstanbul Phone : Fax : Website : The Bank and its subsidiaries are hereafter referred to as the Group. The Group controls equity stakes in companies that are active in the areas of banking, insurance, private pensions, capital market brokerage, asset management, venture capital, factoring, reinsurance, finance leasing, investment banking, real estate investment, service and manufacturing. Activities carried out in these business areas and main companies are explained below in summary. Financial services Anadolu Anonim Türk Sigorta Şirketi ( Anadolu Sigorta ) The Company was established in 1925 and operates in almost all non-life insurance branches. The headquarters of the Company is in İstanbul. The Company s shares are traded in Borsa İstanbul A.Ş. Anadolu Hayat Emeklilik A.Ş. ( Anadolu Hayat ) The Company was founded in 1990 and its headquarters is in İstanbul. The Company s main activities are private individual or group pension and life insurance. There are 24 private pension funds founded by the Company. The Company s shares are traded in Borsa İstanbul A.Ş. Closed Joint Stock Company İşbank ( CJSC İşbank ) CJSC İşbank, which was founded in 1998 and headquartered in Moscow, provides banking services by focusing on deposit, loan and brokerage operations with its 15 branches in several regions of the Russian Federation. Efes Varlık Yönetim A.Ş. ( Efes Varlık ) The field of activity of the Company, which was founded in February 2011, is to purchase and sell the receivables and other assets of deposit banks, participation banks and other financial institutions. The Company s headquarters is in İstanbul. İş Faktoring A.Ş. ( İş Faktoring ) The field of operation of the Company, which operates in the factoring sector since 1993, is domestic and foreign factoring operations. The Company s headquarter is in İstanbul. İş Finansal Kiralama A.Ş. The Company, whose field of activity is financial leasing within the country and abroad started its operations in The headquarters of the Company is in İstanbul. The Company s shares are traded in Borsa İstanbul A.Ş. 10

15 1. Activities of the Bank and the Group (continued) Financial services (continued) İş Gayrimenkul Yatırım Ortaklığı A.Ş. ( İş GYO ) The Company, whose main field of activity is investing in real estate, capital market instruments backed by real estate, real estate projects and capital market instruments, is conducting its business in the sector as a real estate investment trust since The Company s shares are traded in Borsa İstanbul A.Ş. since its establishment. İş Girişim Sermayesi Yatırım Ortaklığı A.Ş. ( İş Girişim ) The Company, which began its venture capital operations in 2000, is making long-term investments in entrepreneurships founded or to be found in Turkey with a development potential and in need of capital. The Company s shares are traded in Borsa İstanbul A.Ş. since Is Investment Gulf Ltd.( Is Investment ) The purpose of Is Investment, which was founded in Dubai in 2011, is to operate in capital markets in the Gulf Region. İş Portföy Yönetimi A.Ş. ( İş Portföy ) The purpose of the Company, which was founded in 2000, is to engage in capital market operations stated in its articles of association. Among the capital market operations, the Company offers portfolio management and investment consulting services for corporate investors exclusively. İş Yatırım Menkul Değerler A.Ş. ( İş Menkul ) The Company s main field of activity is composed of intermediation, corporate finance, investment consulting and private portfolio management services. The Company s shares are traded in Borsa İstanbul A.Ş. since May As of 30 June 2014, the Company has taken over Camiş Menkul Değerler A.Ş. through merger, which was another consolidated subsidiary of the Group before the merger. İş Yatırım Ortaklığı A.Ş. The field of activity of the Company, which was founded in İstanbul in 1995, is portfolio management. The Company s shares are traded in Borsa İstanbul A.Ş. since April As at April 2014 the name of the Company was changed to İş Yatırım Ortaklığı A.Ş. from İş B Tipi Yatırım Ortaklığı A.Ş. İşbank AG İşbank AG was founded to carry out the banking transactions of the Bank in Europe. İşbank AG has 17 branches in total, 13 branches in Germany, 1 branch in the Netherlands, 1 branch in France, 1 branch in Switzerland and 1 branch in Bulgaria. Maxis Investments Ltd. The purpose of the Company, which was founded in England in 2005, is to engage in activities in foreign capital markets. Milli Reasürans T.A.Ş. ( Milli Reasürans ) The Company, which was founded in 1929 to provide reinsurance services, is located in İstanbul. 11

16 1. Activities of the Bank and the Group (continued) Financial services (continued) TSKB Gayrimenkul Yatırım Ortaklığı A.Ş. ( TSKB GYO ) The major field of activity of the Company, which was founded in 2006, is to create and develop an investment property portfolio and to invest in capital market instruments that are based on investment properties. The Company s shares are traded in Borsa İstanbul A.Ş. since April Türkiye Sınai Kalkınma Bankası A.Ş. ( TSKB ) TSKB, the first industrial development and investment bank of Turkey, is founded especially to support private sector investments in industry and to provide domestic and foreign capital to Turkish companies. The Bank s shares are traded in Borsa İstanbul A.Ş. Yatırım Finansman Menkul Değerler A.Ş. ( Yatırım Finansman ) The purpose of the Company, which was founded in 1976, is to engage in capital market operations stated in its articles of association. The Company is located in İstanbul. Arap Türk Bankası A.Ş. ( Arap Türk ) Arap Türk has been established on 18 July 1976 as a joint stock entity in accordance with an agreement signed between the Republic of Turkey and the Libyan Arab Republic. In accordance with the Articles of Association, the Board of Directors shall elect a Chairman among its Turkish members and a Deputy Chairman among its Arab members. The General Manager shall always be nominated by the Arab shareholders and assigned by the Board. Glass Türkiye Şişe ve Cam Fabrikaları A.Ş. ( Şişecam Group ) Şişecam Group consists of a holding company, Türkiye Şişe ve Cam Fabrikaları A.Ş., 54 subsidiaries, 5 joint ventures and 3 associates. Türkiye Şişe ve Cam Fabrikaları A.Ş. started its glass production in Besides Turkey, Şişecam Group operates in various countries such as Bosnia-Herzegovina, Bulgaria, Georgia, Netherlands, Egypt, Ukraine, Russia and Romania. Şişecam Group s core business is mainly glass production. In addition, Şişecam Group is engaged in the complementary industrial and commercial operations related to glass production and participated in various industrial and commercial companies capital and management. Telecommunications Avea İletişim Hizmetleri A.Ş ( Avea ) Avea is a mobile communications operator officially founded on 19 February 2004 with the merger of Türk Telekomünikasyon Anonim Şirketi s ( Türk Telekom ) GSM operator Aycell with Is-TIM, joint venture of the Group and Telecom Italia Mobile. In September 2006, Türk Telekom increased its stake in Avea to a controlling 81.12% through buying Telecom Italia s 40.60% stake in the company with the remaining 18.05% held by the Group. With the board decision held on February 2012, share capital has been decreased by TL 3,295,000 and increased by TL 3,295,000 in cash on the same day. The Group did not participate in capital increase using its preemptive right. Therefore, the percentage of the Group shareholding decreased to 9.57% from 17.83% while shareholding of Türk Telekom increased to 89.99% from 81.37%. 12

17 1. Activities of the Bank and the Group (continued) Others Bayek Tedavi Sağlık Hizmetleri ve İşletme A.Ş. ( Bayek ) The Company was founded in 1992 and it operates in medical and education services. İş Net Elektronik Bilgi Üretim Dağıtım Ticaret ve İletişim Hizmetleri A.Ş. ( İş Net ) İş Net locally and globally provides service in information and technology sectors since İş Koray Turizm Ormancılık Madencilik İnşaat Taahhüt ve Ticaret A.Ş. ( İş Koray ) It operates as a contractor of major construction projects since its establishment in The title and the capital structure of İş Koray Turizm Ormancılık İnşaat Taahhüt ve Ticaret A.Ş. was changed to İş Altınhas İnşaat Taahhüt ve Ticaret A.Ş. on 13 January Nemtaş Nemrut Liman İşletmeciligi A.Ş. ( Nemtaş ) Nemtaş is a Turkish registered shipping company which was established in 1981, operating a fleet of dry bulk vessels. Nemtaş engages in ship management and related activities such as chartering and brokering facilities, and ship agency services. Numnum Yiyecek ve İçecek AŞ. ( Numnum ) Numnum opened its first restaurant in İstanbul, in The Company is managing and operating 10 restaurants, 6 in İstanbul and 4 in Ankara. Toksöz Spor Malzemeleri Tic A.Ş. ( Toksöz Spor ) Toksöz Spor is selling sporting goods and products since Ortopro Tıbbi Aletler Sanayi ve Ticaret A.Ş. ( Ortopro ) Ortopro was founded in 2002 and it produces, trades, exports and imports the orthopedics, medical and surgical instruments. Nevotek Bilişim Ses ve İletişim Sistemleri San. ve Tic. A.Ş. ( Nevotek ) Nevotek is providing project consultancy, research and development of computer hardware, audio technologies and telecommunication systems in domestic and foreign market. The Company is acting as an agent and performing exporting, importing, distributorship, agency, installation, maintenance, after sale services, training and management, and marketing of these systems. Radore Veri Hizmetleri A.Ş. ( Radore ) Radore was established in 2004 with the aim of developing individual and corporate web hosting services. Kanyon Yönetim İşletim ve Pazarlama Ltd. Şti. ( Kanyon ) Kanyon was established on 6 October The main objective and operation of the investment is the management of Kanyon Complex, which includes residences, offices and shops; providing maintenance, security, basic environmental set up and similar activities as well as acting as an agent in the introduction and marketing of the projects belonging to the complex, including property letting and sale. 13

18 2. Basis of preparation 2.1 Statement of compliance The Bank and its subsidiaries operating in Turkey maintain their books of account and prepare their statutory financial statements in Turkish Lira ( TL ) in accordance with the accounting principles as promulgated by the Banking Regulation and Supervision Agency ( BRSA ), Capital Markets Board of Turkey, the Turkish Commercial Code and tax legislation. The foreign subsidiaries maintain their books of account in accordance with the laws and regulations in force in the countries in which they are registered. The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRSs ) and its interpretations adopted by the International Accounting Standards Board ( IASB ). The consolidated financial statements were authorised for issue by the Bank s management on 29 April The Bank s General Assembly and the other reporting bodies have the power to amend the consolidated financial statements after their issue. 2.2 Basis of measurement The consolidated financial statements have been prepared on the historical cost basis as adjusted for the effects of inflation, except for the items presented on a fair value basis that are financial assets at fair value through profit or loss, derivative financial assets and liabilities held for trading purpose and available-forsale investment securities whose fair value can reliably be measured. The methods used to measure fair values are discussed further in Note Functional and presentation currency These consolidated financial statements are presented in TL, which is the Bank s functional currency. Except as otherwise indicated, financial information presented in TL has been rounded to the nearest thousand. Although the currency of the country in which the majority of the Group entities are domiciled is TL, some of the Group entities functional and reporting currencies are different than TL. The table below summarizes the functional currencies other than TL of the Group entities: Functional currency Bulgarian Lev (BGL) Egyptian Pounds (EGP) Currency of European Union (EURO) Georgian Lari (GEL) Great British Pound (GBP) Herzegovina Convertible Mark (KM) Hungarian Forint (HUF) Indian Rupee (INR) Romanian New Leu (RON) Russian Ruble (RUB) Ukrainian Hryvnia (UAH) United Arab Emirates Dirham (AED) United States Dollars (USD) 14

19 2. Basis of preparation (continued) 2.4 Use of estimates and judgments The preparation of the consolidated financial statements in accordance with IFRS requires management to make estimates and assumptions that affect the application of policies and in the measurement of income and expenses in the profit and loss statement and in the carrying value of assets and liabilities in the statement of financial position, and in the disclosure of information in the notes to the financial statements. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. The actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the year in which the estimate is revised and in any future years affected. Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment within the next financial year and about critical judgments in applying accounting policies that have the most significant effect on the amounts recognised in the consolidated financial statements is disclosed below. These disclosures supplement the commentary on financial risk management. Impairment Assets accounted for at amortised cost are evaluated for impairment on a basis described in Note 3.8 financial assets and financial liabilities. Investments in equity securities are evaluated for impairment on the basis described in Note 3.8 financial assets and financial liabilities. An assessment as to whether an investment in sovereign debt is impaired may be complex. In making such an assessment, the Group considers the following factors: The market s assessment of creditworthiness as reflected in the bond yields; The rating agencies assessments of the creditworthiness; The ability of the country to access the capital markets for new debt issuance; The probability of debt being restructured resulting in holders suffering losses through voluntary or mandatory debt forgiveness. Fair value The determination of fair value for financial assets and financial liabilities for which there is no observable market price requires the use of valuation techniques. For financial instruments that trade infrequently and have little price transparency, fair value is less objective, and requires varying degrees of judgment depending on liquidity, concentration, uncertainty of market factors, pricing assumptions and other risks affecting the specific instrument. The Group s accounting policy on fair value measurements is discussed in Note 3.8 financial assets and financial liabilities. The Group measures fair values using the fair value hierarchy which is disclosed in Note 4 financial risk management. Financial asset and liability classification The Group s accounting policies provide scope for assets and liabilities to be designated at inception into different accounting categories in certain circumstances: In classifying financial assets or liabilities as trading, the Group has determined that it meets the description of trading assets and liabilities set out in Note In classifying financial assets as held-to-maturity, the Group has determined that it has both the positive intention and ability to hold the assets until their maturity date as required by Note

20 3. Significant accounting policies The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements, and have been applied consistently by the Group entities. Where necessary, comparative figures have been adjusted to conform with the changes in presentation in the current year. Changes in accounting policies The Group has adopted the following new standards and amendments to standards, including any consequential amendments to other standards, with a date of initial application of 1 January IFRS 10, IFRS 12, IAS 27 Investment Entities (2011) (see (a)) Amendments to IAS 32 Offsetting Financial Assets and Financial Liabilities (see (b)) Amendments to IAS 36 Recoverable Amount Disclosures for Non-Financial Assets (see (c)) IFRIC 21 Levies (see (d)) The nature and the effect of the changes are further explained below. (a) Investment Entities IFRS 10 is amended for entities that meet the definition of an investment entity to qualify for the consolidation exception. According to the amendment, financial assets of an investment entity should be measured at fair value under IFRS 9 Financial Instruments, or to the extent possible under IAS 39 Financial Instruments: Recognition and Measurement. The amendments had no significant impact on the financial position of the Group. (b) Amendments to IAS 32 Offsetting Financial Assets and Financial Liabilities The amendments clarify the meaning of currently has a legally enforceable right to set-off and also clarify the application of the IAS 32 offsetting criteria to settlement systems which apply gross settlement mechanisms that are not simultaneous. As a consequence, the amendment had no significant impact on the financial position of the Group. (c) Amendments to IAS 36 Impairment of Assets - Recoverable Amount Disclosures for Non-Financial Assets As a consequential amendment to IFRS 13 Fair Value Measurement, some of the disclosure requirements in IAS 36 Impairment of Assets regarding measurement of the recoverable amount of impaired assets are modified. The amendments required additional disclosures about the measurement of impaired assets (or a group of assets) with a recoverable amount based on fair value less costs of disposal. The amendment has affected disclosure principles of the recoverable amounts for non-financial assets. The amendments had no significant impact on the financial position of the Group. (d) IFRIC 21 Levies The interpretation clarifies that an entity recognizes a liability for a levy when the activity that triggers payment, as identified by the relevant legislation, occurs. It also clarifies that a levy liability is accrued progressively only if the activity that triggers payment occurs over a period of time, in accordance with the relevant legislation. For a levy that is triggered upon reaching a minimum threshold, the interpretation clarifies that no liability should be recognized before the specified minimum threshold is reached. The interpretation had no significant impact on the financial position of the Group. 16

21 3. Significant accounting policies (continued) 3.1 Basis of consolidation Subsidiaries The consolidated financial statements incorporate the financial statements of the Bank and entities controlled by the Bank (its subsidiaries). The control exists if and only if; 1) when the Bank has the power over an affiliate which that power, directly or indirectly, give rights to govern the financial and operating policies of the entity so as to obtain benefits from its activities, 2) exposure, or rights, to variable returns from its involvement with the affiliate, 3) the ability to use its power over the affiliate to affect the amount of its returns. The Bank reassess its control power over its subsidiaries if there is an indication that there are changes to any of the three elements of control. The results of subsidiaries acquired or disposed of during the year are included in the consolidated statement of income from the effective date of acquisition or up to the effective date of disposal, as appropriate. Business combinations The Group accounts for business combinations using the acquisition method when control is transferred to the Group. The Group measures goodwill at the acquisition date as: the fair value of the consideration transferred; plus the recognised amount of any non-controlling interests in the acquiree; plus if the business combination is achieved in stages, the fair value of the pre-existing equity interest in the acquiree; less the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed. When the excess is negative, a bargain purchase gain is recognised immediately in profit or loss. The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts generally are recognised in profit or loss. Transactions costs, other than those associated with the issue of debt or equity securities, that the Group incurs in connection with a business combination are expensed as incurred. Any contingent consideration is measured at fair value at the acquisition date. If the contingent consideration is classified as equity, it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes to the fair value of the contingent consideration are recognised in profit or loss. 17

22 3. Significant accounting policies (continued) 3.1 Basis of consolidation (continued) Interests in equity-accounted investees The Group s interests in equity-accounted investees comprise interests in associates and joint ventures. Associates are those entities in which the Group has significant influence, but not control or joint control, over the financial and operating policies. A joint venture is an arrangement in which the Group has joint control, whereby the Group has rights to the net assets of the arrangement, rather than rights to its assets and obligations for its liabilities. Interests in associates and the joint ventures are accounted for using the equity method. They are recognised initially at cost, which includes transaction costs. Subsequent to initial recognition, the consolidated financial statements include the Group s share of the profit or loss and other comprehensive income of equity-accounted investees, until the date on which significant influence or joint control ceases. Special purpose entities Special purpose entities are entities that are created to accomplish a narrow and well defined objective such as the securitisation of particular assets, or the execution of a specific borrowing or lending transaction. The Group does not have any direct or indirect shareholdings in these entities. Special purpose entities are consolidated when the substance of the relationship between the Group and the special purpose entity indicates that the special purpose entity is controlled by the Group. Non-controlling interests Non-controlling interests are measured at their proportionate share of the acquiree s identifiable net assets at the acquisition date. Changes in the Group s interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions. Loss of control When the Group loses control over a subsidiary, it derecognises the assets and liabilities of the subsidiary, and any related Non-controlling interests and other components of equity. Any resulting gain or loss is recognised in profit or loss. Any interest retained in the former subsidiary is measured at fair value when control is lost. Transactions eliminated on consolidation Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated. Unrealised gains arising from transactions with equity-accounted investees are eliminated against the investment to the extent of the Group s interest in the investee. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. 18

23 3. Significant accounting policies (continued) 3.1 Basis of consolidation (continued) Group entities Subsidiaries Effective Interest Rate % 31 December Country of incorporation December 2013 Manufacturing (Glass industry) Anadolu Cam Eskişehir Sanayi A.Ş. Turkey Anadolu Cam Investment B.V. Netherlands Anadolu Cam San. A.Ş. Turkey Anadolu Cam Yenişehir Sanayi A.Ş. Turkey Automotive Glass Alliance Rus Trading OOO Russia Automotive Glass Alliance Rus ZAO Russia Balsand B.V. Netherlands CJSC Brewery Pivdenna Ukraine Camiş Ambalaj San. A.Ş. Turkey Çayırova Cam San. A.Ş. Turkey Denizli Cam San. A.Ş. Turkey Fritz Beteiligungsgesellschaft GmbH (1) Germany Fritz Holding GmbH Germany Glass Corp S.A. Romania JSC Mina Georgia Merefa Glass Company Ltd. Ukraine OAO Ruscam Pokrovsky Russia OOO Posuda Russia OOO Ruscam Glass Packaging Holding Russia OOO Ruscam Glass (2) Russia OOO Ruscam Gorokhovetz Russia OOO Ruscam Management Company Russia OOO Ruscam Sibir Russia Paşabahçe Cam San. ve Tic. A.Ş. (3) Turkey Paşabahçe Investment B.V. Netherlands Paşabahçe Mağazaları A.Ş. Turkey Paşabahçe SRL Italy Richard Fritz GmbH+Co. KG (4) Germany Richard Fritz Inc. (5) USA Richard Fritz Kft Hungary Richard Fritz Prototype+Spare Parts GmbH Germany Richard Fritz Spol S.R.O Slovakia Trakya Cam Investment B.V. Netherlands Trakya Cam Sanayii A.Ş. Turkey Trakya Glass Bulgaria EAD Bulgaria Trakya Glass Kuban OOO (6) Russia Trakya Glass Rus AO (7) Russia Trakya Glass Rus Trading OOO Russia Trakya Investment B.V. Netherlands Trakya Polatlı Cam Sanayii A.Ş. Turkey Trakya Yenişehir Cam Sanayi A.Ş. Turkey TRSG Autoglass Holding B.V. Netherlands TRSG Glass Holding B.V. Netherlands Türkiye Şişe ve Cam Fab. A.Ş. Turkey Manufacturing (Other) Asmaş Ağır Sanayi Mak. A.Ş. (8) Turkey Cam Elyaf San. A.Ş. Turkey Camiş Egypt Mining Co. Egypt Camiş Elektrik Üretim A.Ş. Turkey Camiş Limited England Camiş Madencilik A.Ş. Turkey Cromital S.p.A. Italy Madencilik San. ve Tic. A.Ş. Turkey Nemtaş Turkey Ortopro Turkey SC Glass Trading BV (9) Netherlands Soda San. A.Ş. Turkey Şişecam Bulgaria Ltd. Bulgaria Şişecam Chem Invesment BV Netherlands Şişecam Enerji A.Ş. (10) Turkey

24 3. Significant accounting policies (continued) 3.1 Basis of consolidation (continued) Group entities (continued) Subsidiaries Effective Interest Rate % 31December Country of Incorporation December 2013 Manufacturing (Other) Şişecam Soda Lukavac DOO Bosnia Herzegovina Toksöz Spor Turkey Holding Camiş Yatırım Holding A.Ş. Turkey Trakya Yatırım Holding A.Ş. Turkey Service Bayek Turkey İş Merkezleri Yön. ve İşl. A.Ş. Turkey İş Net Turkey Mipaş Mümessillik İth. İhr.ve Paz. A.Ş. Turkey Nevotek Turkey Num Num Turkey Şişecam Dış Ticaret A.Ş. Turkey Banking CJSC İşbank Russia İşbank AG Germany TSKB Turkey Reinsurance Milli Reasürans Turkey Insurance Anadolu Hayat Turkey Anadolu Sigorta Turkey Şişecam Sigorta Aracılık Hizmetleri A.Ş. Turkey Leasing İş Finansal Kiralama A.Ş. Turkey Factoring İş Faktoring Turkey Other financial Camiş Menkul Değerler A.Ş. (11) Turkey Efes Varlık Turkey İş Girişim Turkey İş GYO Turkey Is Investment United Arab Emirates İş Menkul Turkey İş Portföy Turkey İş Yatırım Ortaklığı A.Ş. (12) Turkey Maxis Investments Ltd. England TSKB GYO Turkey Yatırım Finansman Turkey (1) On 21 September 2014, the company merged with Fritz Holding GmbH. (2) The title of OOO Ruscam Kuban was changed to OOO Ruscam Glass on 28 March (3) An agreement regarding sale of 15.4% of Group shares in Paşabahçe Cam Sanayii ve Ticaret A.Ş. to European Bank for Reconstruction and Development against EURO 125,000,000 has been signed on 10 November (4) The merging process which was iniated on 21 August 2014 with Fritz Holding GmbH and completed on 31 December (5) Richard Fritz Inc., which has no investing activity, has been liquidated on 31 December (6) Trakya Glass Kuban OOO which has no investment activities entered the process of liquidation on 14 January 2014, and has officially been closed down on 5 May (7) The title of Trakya Glass Rus ZAO was changed to Trakya Glass Rus AO 11 December (8) Shares of Asmaş Ağır Sanayi Makinaları A.Ş. were sold to CTS Demir Çelik İç ve Dış Ticaret Mühendislik Makine Sanayii Ltd. Şti. amounting to TL 27,150 as cash on 15 July (9) The company was established on 22 August 2014 with the purpose of providing import and sales services to the Group companies. (10) The minority shares of subsidiary operating under chemicals group of Şişecam Group, Dost Gaz Depolama A.Ş. s shares were acquired on 14 April 2014 and the legal title of the Company was changed as Şişecam Enerji A.Ş. on 26 May (11) Camiş Menkul Değerler A.Ş. merged with İş Menkul on 30 June (12) As at April 2014 the name of the Company was changed to İş Yatırım Ortaklığı A.Ş. from İş B Tipi Yatırım Ortaklığı A.Ş. 20

25 3. Significant accounting policies (continued) 3.1 Basis of consolidation (continued) Group entities (continued) Special purpose entities Country of Incorporation TIB Card Receivables Funding Company Limited TIB Diversified Payment Rights Finance Company England England The following investments in associates and joint ventures which the Group has significant influences have been accounted for using the equity method: Investment in associates 31 December December 2013 Country of Incorporation Ownership % Ownership % Adana Otel Projesi Adi Ortaklığı Turkey Arap Türk Turkey Avea Turkey HNG Float Glass Ltd. India İş Koray Turkey Kanyon Turkey OAO Form Mat Russia Omco İstanbul Kalıp Sanayii ve Tic. A.Ş. Turkey OOO Balkum Russia Oxyvit Kimya San. ve Tic. A.Ş. Turkey Nest in Globe B.V. (*) Netherlands Radore (**) Turkey Rudnika Krecnjaka Vijenac D.O.O. Lukavac Bosnia Herzegovina Saint Gobain Glass Egypt S.A.E. Egypt Solvay Şişecam Holding AG ( Solvay Şişecam ) Austria (*) Nest in Globe B.V. is officially terminated on 16 July (**) The Group invested in Radore on 2 October

26 3. Significant accounting policies (continued) 3.2 Foreign currency Foreign currency transactions Transactions in foreign currencies are translated into the respective functional currency of Group entities at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are translated to the functional currency at the exchange rate at the date that the fair value was determined. Foreign currency differences arising on retranslation are generally recognised in profit or loss, except for differences arising on the retranslation of available-for-sale equity instruments, which are recognised directly in equity. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Foreign operations The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated to TL at foreign exchange rates ruling at the reporting date. The income and expenses of foreign operations are translated to TL at exchange rates approximating to the exchange rates at the dates of the transactions. Foreign currency differences are recognised in other comprehensive income, and presented in the foreign currency translation reserve (translation reserve) in equity. However, if the operation is a non-whollyowned subsidiary, then the relevant proportionate share of the translation difference is allocated to the noncontrolling interests. When a foreign operation is disposed of such that control, significant influence is lost, the cumulative amount in the translation reserve related to that foreign operation is reclassified to profit or loss as part of the gain or loss on disposal. When the Group disposes of only part of its interest in a subsidiary that includes a foreign operation while retaining control, the relevant proportion of the cumulative amount is reattributed to non-controlling interests. When the Group disposes of only part of its investment in an associate or joint venture that includes a foreign operation while retaining significant influence or joint control, the relevant proportion of the cumulative amount is reclassified to profit or loss. Foreign exchange gains and losses arising from a monetary item receivable from or payables to a foreign operation, the settlement of which is neither planned nor likely in the foreseeable future, are considered to form part of a net investment in a foreign operation and are recognised directly in equity in the foreign currency translation reserve. As at 31 December 2014 and 2013 foreign currency assets and liabilities of the Group are mainly in US Dollar ( USD ), EURO and GBP. The TL/USD, TL/EURO and TL/GBP exchange rates as at 31 December 2014 and 2013 are as follows: 31 December December 2013 Period end Average Period end Average TL / USD TL / EURO TL / GBP

27 3. Significant accounting policies (continued) 3.3 Interest Interest income and expense are recognised in the profit or loss using the effective interest method except for the interest income on overdue loans. The effective interest rate is the rate that exactly discounts the estimated future cash payments and receipts through the expected life of the financial asset or liability (or, where appropriate, a shorter period) to the carrying amount of the financial asset or liability. The effective interest rate is established on initial recognition of the financial asset and liability and is not revised subsequently. When calculating the effective interest rate, the Group estimates future cash flows considering all contractual terms of the financial instruments, but not future credit losses. The calculation of the effective interest rate includes all fees and commissions paid or received transaction costs, and discounts or premiums that are integral part of the effective interest rate. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of financial assets or liabilities. Interest income and expense presented in the consolidated statement of income include: interest on financial assets and liabilities measured at amortised cost calculated on an effective interest basis, interest on available-for-sale investment securities calculated on an effective interest basis, interest earned till the disposal of financial assets at fair value through profit or loss. Interest income and expense on all trading assets and liabilities are considered to be incidental to the Group s trading operations and are presented together with all other changes in the fair value of trading assets and liabilities in net trading income. 3.4 Fees and commissions Fees and commission income and expenses that are integral to the effective interest rate on a financial asset or liability are included in the measurement of the effective interest rate. Other fees and commission income, including account servicing fees, investment management fees, sales commission, placement fees and syndication fees, commissions for insurance business (see also accounting policy Note 3.27) are recognised as the related services are performed. When a loan commitment is not expected to result in the draw-down of a loan, the related loan commitment fees are recognised on a straightline basis over the commitment period. Other fees and commission expense relates mainly to transaction and service fees, which are expensed as the services are received. 3.5 Net trading income Net trading income includes gains and losses arising from disposals of financial assets at fair value through profit or loss, interest income and expense on all trading assets and liabilities, the disposal of available-forsale financial assets, gains and losses on derivative financial instruments held for trading purpose and foreign exchange differences. 3.6 Dividends Dividend income is recognised when the right to receive the income is established. 23

28 3. Significant accounting policies (continued) 3.7 Manufacturing and other operations revenue Revenues are recognised on an accrual basis at the fair values incurred or to be incurred when the goods are delivered, the risks and rewards of ownership of the goods are transferred, when the amount of revenue can be reliably measured and it is probable that the future economic benefits associated with the transaction will flow to the entity. Net sales represent the fair value of goods shipped less sales discounts and returns. When the arrangement effectively constitutes a financing transaction, the fair value of the consideration is determined by discounting all future receipts using an imputed rate of interest. The difference between the fair value and the nominal amount of the consideration is recognised in the period on an accrual basis as financial income. Sales of the goods Income obtained from the sales of the goods is accounted after the below conditions are executed: The Group s transferring all the important risks and gains related to the property to the buyer, The Group not having any control on the continued administrative participation associated with property and on the sold properties, Measuring the amount of income reliably, Possibility of a flow of the economic benefits related to the act to the Group, and Measuring the costs resulting from the act reliably. Services provided Contract revenue and costs related to the projects are recognised when the amount of revenue can be reliably measured and the increase in the revenue due to change in the scope of the contract related with the project is highly probable. Contract revenue is measured at the fair value of the consideration received or receivable. Projects are fixed price contracts and revenue is recognised in accordance with the percentage of completion method. The portion of the total contract revenue corresponding to the completion rate is recognised as contract revenue in the relevant period. Rent income from investment properties Rent income generated during the period from investment properties are recognised on an accrual basis. Revenue can only be realised if the amount is reliably measured and the inflow of the economic benefits related with the transaction to the Group is probable. 3.8 Financial assets and financial liabilities Recognition The Group initially recognises loans and advances, deposits, debt securities issued and subordinated liabilities on the date that they are originated. Regular way purchases and sales of financial assets are recognised on the trade date at which the Group commits to purchase or sell the asset. All other financial assets and liabilities are initially recognised on the trade date at which the Group becomes a party to the contractual provisions of the instrument. A financial asset or liability is measured initially at fair value plus, for an item not at fair value through profit or loss, transaction costs that are directly attributable to its acquisition or issue. 24

29 3. Significant accounting policies (continued) 3.8 Financial assets and financial liabilities (continued) Derecognition The Group derecognises a financial asset when the contractual rights to the cash flows from the financial asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. On derecognition of a financial asset, the difference between the carrying amount of the asset or the carrying amount allocated to the portion of the asset transferred, and the sum of (i) the consideration received (including any new asset obtained less any new liability assumed) and (ii) any cumulative gain or loss that had been recognised in other comprehensive income is recognised in profit or loss. The Group derecognises financial liabilities when its contractual obligations are discharged, cancelled or expired. Derivative financial instruments and hedge accounting The Group holds derivative financial instruments to hedge its foreign currency and interest rate risk exposures. Embedded derivatives are separated from the host contract and accounted for separately if certain criteria are met. Derivatives are initially recognized at fair value; any directly attributable transaction costs are recognized in profit or loss as incurred. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are generally recognized in profit or loss. Cash flow hedges When a derivative is designated as a cash flow hedging instrument, the effective portion of changes in the fair value of the derivative are recognized in other comprehensive income and accumulated in hedging reserve in equity. Any ineffective portion of changes in the fair value of the derivative is recognized immediately in profit or loss. If the derivative expires or is sold, terminated, or exercised, or no longer meets the criteria for cash flow hedge accounting, or the designation is revoked, then hedge accounting is discontinued and the amount recognized in other comprehensive income and presented in the hedging reserve in equity remains there until the forecast transaction affects the income. If the forecast transaction is no longer expected to occur, then hedge accounting is discontinued and the balance in other comprehensive income is recognized immediately in income. Embedded derivatives Derivatives may be embedded in another contractual arrangement (a "host contract"). The Bank and its affiliates account for embedded derivatives separately from the host contract when the host contract is not itself carried at fair value through profit or loss, and the characteristics of the embedded derivatives are not clearly and closely related to the host contract. Separated embedded derivatives are accounted for depending on their classification, and are presented in the statement of financial position together with the host contract. Offsetting Financial assets and liabilities are offset and the net amount is presented in the separate statement of financial position when, and only when, the Group has a legal right to set off the amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. Income and expenses are presented on a net basis only when permitted by the accounting standards, or for gains and losses arising from a group of similar transactions such as in the Group s trading activity. 25

30 3. Significant accounting policies (continued) 3.8 Financial assets and financial liabilities (continued) Amortised cost measurement Amortised cost is calculated by taking into account all fees paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. For investments carried at amortised cost, gains and losses are recognised in profit or loss when the investments are derecognised or impaired, as well as through the amortisation process. Fair value measurement Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or, in its absence, the most advantageous market to which the Group has access at that date. The fair value of a liability reflects its nonperformance risk. When available, the Group measures the fair value of an instrument using the quoted price in an active market for that instrument. A market is regarded as active if transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. If there is no quoted price in an active market, then the Group uses valuation techniques that maximise the use of relevant observable inputs and minimise the use of unobservable inputs. The chosen valuation technique incorporates all of the factors that market participants would take into account in pricing a transaction. The best evidence of the fair value of a financial instrument at initial recognition is normally the transaction price i.e. the fair value of the consideration given or received. If the Group determines that the fair value at initial recognition differs from the transaction price and the fair value is evidenced neither by a quoted price in an active market for an identical asset or liability nor based on a valuation technique that uses only data from observable markets, then the financial instrument is initially measured at fair value, adjusted to defer the difference between the fair value at initial recognition and the transaction price. Subsequently, that difference is recognized in profit or loss on an appropriate basis over the life of the instrument but no later than when the valuation is wholly supported by observable market data or the transaction is closed out. The Group recognises transfers between levels of the fair value hierarchy as of the end of the reporting period during which the change has occurred. 26

31 3. Significant accounting policies (continued) 3.8 Financial assets and financial liabilities (continued) Fair value measurement (continued) Identification and measurement of impairment The Group assesses at each reporting date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired when objective evidence demonstrates that a loss event has occurred after the initial recognition of the asset, and that the loss event has an impact on the future cash flows of the asset that can be estimated reliably. Assets carried at amortised cost In determining whether an impairment loss should be recorded profit or loss, the Group makes judgments as to whether there is any observable data indicating that there is a measurable decrease in the estimated amounts recoverable from a portfolio of loans and individual loans. Objective evidence that a financial asset or group of assets is impaired includes observable data that comes to the attention of the Group about the following loss events: significant financial difficulty of the issuer or obligor; a breach of contract, such as a default or delinquency in interest or principal payments by more than 90 days; the Bank granting to the borrower, for economic or legal reasons relating to the borrower s financial difficulty, a concession that the lender would not otherwise consider; becoming probable that the borrower will enter bankruptcy or other financial reorganisation; the disappearance of an active market for that financial asset because of financial difficulties; or observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the group, including: (i) adverse changes in the payment status of borrowers; or (ii) national or local economic conditions that correlate with defaults on the assets in the group. 27

32 3. Significant accounting policies (continued) 3.8 Financial assets and financial liabilities (continued) Assets carried at amortised cost (continued) All loans except leasing receivables with principal and/or interest overdue for more than 90 days are considered as impaired and individually assessed. If there is objective evidence that an impairment loss on loans and receivables or held-to-maturity investments carried at amortised cost has been incurred, the amount of the loss is measured based on the difference between the asset s carrying amount and the estimated recoverable amount, determined by the net present value of the expected future cash flows discounted at the loan s original effective interest rate. The estimated recoverable amount of a collateralized financial asset is measured based on the amount that is expected to be realised from foreclosure less costs for obtaining and selling the collateral, whether or not the foreclosure is probable. The carrying amount of the asset is reduced through the use of an allowance account. The amount of the loss is recognised in profit or loss. The Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, the asset is included in a group of financial assets with similar credit risk characteristics and that group of financial assets is collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment. The calculation of the present value of the estimated future cash flows of a collateralized financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable. For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics (i.e., on the basis of the Group s grading process that considers asset type, industry, geographical location, collateral type, past-due status and other relevant factors). Those characteristics are relevant to the estimation of future cash flows for Group of such assets by being indicative of the debtors ability to pay all amounts due according to the contractual terms of the assets being evaluated. Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows of the assets in the group and historical loss experience for assets with credit risk characteristics similar to those in the group. The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Group to reduce any differences between loss estimates and actual loss experience. A write off is made when all or part of a loan is deemed uncollectible or in the case of debt forgiveness. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been determined. Write offs are charged against previously established allowances and reduce the principal amount of a loan. Subsequent recoveries of amounts previously written off are included in profit or loss. 28

33 3. Significant accounting policies (continued) 3.8 Financial assets and financial liabilities (continued) Identification and measurement of impairment (continued) Assets carried at fair value Available-for-sale equity investments are impaired when there has been a significant or prolonged decline in the fair value below its cost. If an available-for-sale asset is impaired, an amount comprising the difference between its cost (net of any principal payment and amortisation) and its current fair value, less any impairment loss previously recognised in profit or loss, is transferred from equity to profit or loss. Impairment losses recognised in profit or loss on equity instruments classified as available for sale are not reversed through statement of profit or loss. Reversals of impairment losses on debt instruments are reversed through profit or loss; if the increase in fair value of the instrument can be objectively related to an event occurring after the impairment loss was recognised in profit or loss. 3.9 Cash and cash equivalents Cash and cash equivalents comprise cash on hand, unrestricted balances held with central banks and highly liquid financial assets original maturities of less than three months, which are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value. Cash and cash equivalents are carried at amortised cost in the consolidated statement of financial position Trading assets and liabilities Trading assets and liabilities are those assets and liabilities that the Group acquires or incurs principally for the purpose of selling or repurchasing in the near term, or holds as part of a portfolio that is managed together for short-term profit or position taking. Derivatives are also classified as held-for-trading unless they are designated as effective hedging instruments. Trading assets and liabilities are initially recognised and subsequently measured at fair value in the statement of financial position, with transaction costs recognised in profit or loss. All changes in fair value are recognised as part of net trading income in profit or loss. The Group did not reclassify any trading assets and liabilities subsequent to their initial recognition Loans and advances Loans and advances are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and that the Group does not intend to sell immediately or in the near term. They arise when the Group provides money, goods or services directly to a debtor with no intention of trading the receivable. Such assets are carried at amortised cost using the effective interest method less any impairment in value. Gains and losses are recognised in profit or loss when the loans and receivables are derecognised or impaired, as well as through the amortisation process. Interest earned on such loans and receivables is reported as interest income Investment securities Investment securities are initially measured at fair value plus incremental direct transaction costs and subsequently accounted for depending on their classification as either held-to-maturity or available-forsale. 29

34 3. Significant accounting policies (continued) 3.12 Investment securities (continued) Financial assets held for trading Financial assets held for trading are those acquired for the purpose of generating profit from short term market fluctuations in prices or similar elements, or securities which are part of a portfolio set up to realize short term profit regardless of the purpose of acquisition. Financial assets held for trading is presented in the statement of financial position with their fair values and is subject to valuation at fair values after the initial recognition. In cases where values that form the basis for the fair value do not exist in active market conditions, it is accepted that the fair value is not reliably determined and amortized cost, calculated by the internal rate of return method, is taken into account as the fair value. Any gains or losses resulting from such valuation are recorded in the profit and loss accounts. In frame of legal regulations, any positive difference between the historical cost and amortized cost of financial assets are recognized under the Interest Income account, and in case the fair value of the asset is over the amortized cost, the positive difference is recognized in the Gains on Securities Trading account. If the fair value is less than the amortized cost, the negative difference is recognized under the Losses on Securities Trading account. Any profit or loss resulting from the disposal of those assets before their maturity date is recognized within the framework of the same principles Financial assets available for sale Financial assets available for sale represent non-derivative financial assets other than bank loans and receivables, held to maturity investments and financial assets at fair value through profit and loss. Initial recognition and subsequent valuation of financial assets available for sale are performed based on the fair value including transaction costs. The amount arising from the difference between cost and amortized value is recognized through income statement by using the internal rate of return. If a price does not occur in an active market, fair value cannot be reliably determined and Amortized Value is determined as the fair value using the internal rate of return. Unrealized gains and losses arising from changes in fair value of the financial assets available for sale are not recognized in the income statement, they are recognized in the Marketable Securities Revaluation Fund until the disposal, sale, redemption or incurring loss of those assets. Fair value differences accounted under equity arising from the application of fair value are reflected to the income statement when these assets are sold or when the valuation difference is collected. Held to maturity investments Non-derivative financial assets with fixed or determinable payments and fixed maturity that management has both the intent and the ability to hold to maturity are classified as held-to-maturity. Investments intended to be held for an undefined period are not included in this classification. Any sale or reclassification of a more than insignificant amount of held-to-maturity investments not close to their maturity would result in the reclassification of all held-to-maturity investments as available-for-sale, and put restrictions on the Group for classifying investment securities as held-to-maturity for the current and the following two financial years. There has been no tainting in the held-to-maturity portfolio during 2014 and Held to maturity investments are subsequently measured at amortised cost using the effective interest method, less any impairment in value. Interest earned whilst holding held to maturity securities is reported as interest income. When financial assets are transferred to held-to-maturity category from available-for-sale portfolio, as a result of a change in intention, the fair value carrying amount of the related financial assets becomes the new amortised cost. Any previous gain or losses on those assets that have been recognised in equity are amortised over the remaining life of the held-to-maturity investments using the effective interest method. 30

35 3. Significant accounting policies (continued) 3.13 Repurchase transactions The Group enters into purchases/sales of investments under agreements to resell/repurchase substantially identical investments at a certain date in the future at a fixed price. Investments purchased subject to commitments to resell them at future dates are not recognised. The amounts paid are recognised as receivables from reverse repurchase agreements in the accompanying consolidated financial statements. The receivables are shown as collateralized by the underlying security. Investments sold under repurchase agreements continue to be recognised in the consolidated statement of financial position and are measured in accordance with the accounting policy for either assets held for trading, held to maturity or availablefor-sale as appropriate. The proceeds from the sale of the investments are reported as obligations under repurchase agreements. Income and expenses arising from the repurchase and resale agreements over investments are recognised on an accruals basis over the period of the transaction and are included in interest income or interest expense Trade receivables Trade receivables that are created by way of providing goods or services directly to a debtor are carried at amortised cost. Trade receivables, net of unearned financial income, are measured at amortised cost, using the effective interest rate method, less the unearned financial income. Short duration receivables with no stated interest rate are measured at the original invoice amount unless the effect of imputing interest is significant. A doubtful receivable provision for trade receivables is established if there is objective evidence that the Group will not be able to collect all amounts due. The amount of provision is the difference between the carrying amount and the recoverable amount, being the present value of all cash flows, including amounts recoverable from guarantees and collateral, discounted based on the original effective interest rate of the originated receivables at inception. If the amount of the impairment subsequently decreases due to an event occurring after the write-down, the release of the provision is recognised in profit or loss Inventories Inventories are valued at the lower of cost or net realisable value. Cost elements included in inventories are materials, labor and an appropriate amount for factory overheads. The cost of borrowings is not included in the costs of inventories. The cost of inventories is determined on the weighted average basis for each purchase. Net realisable value is the estimated selling price in the ordinary course of business, less the costs of completion and selling expenses. Inventories consist of raw material, semi finished goods, finished goods, commercial goods and other stocks. 31

36 3. Significant accounting policies (continued) 3.16 Property, plant and equipment Recognition and measurement Items of property, plant and equipment are measured at cost less accumulated depreciation and any accumulated impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. The gain or loss on disposal of an item of property, plant and equipment is determined by comparing the proceeds from disposal with the carrying amount of the item of property, plant and equipment, and are recognised net within the other operating income or other operating expense in profit or loss. The carrying values of property, plant and equipment are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. If any such indication exists and where the carrying values exceed the estimated recoverable amount, the assets of cash generating units are written down to their recoverable amount. The recoverable amount is defined as the amount that is the higher of the asset s fair value less costs to sell and value in use. Impairment losses are recognised in profit or loss. Subsequent costs The cost of replacing a part of an item of property, plant or equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Group and its cost can be measured reliably. The carrying amount of the replaced part is derecognised. The costs of the day-to-day servicing of property, plant and equipment are recognised in profit or loss as incurred. Depreciation Depreciation is recognised in profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. Leased assets under finance leases are depreciated over the shorter of the lease term and their useful lives. Land is not depreciated. The estimated useful lives for the current and comparative periods are as follows: Buildings 4 50 years Fixtures and fittings 2 20 years Machinery and equipment 2 25 years Leasehold improvements 4 15 years Motor vehicles 3 15 years Vessels 18 years The residual values, useful lives and depreciation methods are reviewed, and adjusted if appropriate, at each reporting date. 32

37 3. Significant accounting policies (continued) 3.16 Property, plant and equipment (continued) Derecognition An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognizing of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in profit or loss in the year the asset is derecognised Investment property Investment property is property held either to earn rental income or for capital appreciation or for both, but not for sale in the ordinary course of business, use in the production or supply of goods or services or for administrative purposes. Investment property is measured at cost less accumulated depreciation and any accumulated impairment losses. Estimated useful lives of investment properties and depreciation rates are 50 years and 2%, respectively. Cost includes expenditure that is directly attributable to the acquisition of the investment property. Any gain or loss on disposal of an investment property (calculated as the difference between the net proceeds from disposal and the carrying amount of an item) is recognized in profit or loss. When the use of a property changes such that it is reclassified as property, plant and equipment, its fair value at the date of reclassification becomes its cost for subsequent accounting Intangible assets Goodwill Goodwill that arises upon the acquisition of subsidiaries the excess of the cost of the acquisition over the Group s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the acquiree. When the excess is negative (negative goodwill), it is recognised immediately in profit or loss. Acquisitions of non-controlling interests Acquisition of non-controlling interests are accounted for as transactions with equity holders in their capacity as equity holders and therefore no goodwill is recognised as a result of such transactions. Subsequent measurement Goodwill is measured at cost less accumulated impairment losses. 33

38 3. Significant accounting policies (continued) 3.18 Intangible assets (continued) Intangible assets acquired Intangible assets acquired separately are carried at cost, less accumulated amortisation and any accumulated impairment losses. Amortisation is charged on a straight-line basis over their estimated useful lives. Estimated useful life and amortisation method are reviewed at the end of each annual reporting period, with the effect of any changes in the estimate being accounted for on a prospective basis. The related costs are amortised at between 1 and 15 years based on their economic lives. Subsequent expenditure Subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure, including expenditure on internally generated goodwill and brands, is recognised in profit or loss as incurred. Computer software Acquired computer software licenses are capitalized on the basis of the costs incurred to acquire and bring to use the specific software. Software is amortised on a straight line basis in profit or loss over its estimated useful life, from the date that it is available for use. The estimated useful life of software for the current and comparative periods is one to five years. Costs associated with developing or maintaining computer software programs are recognised as an expense as incurred. Costs that are directly associated with the development of identifiable and unique software products controlled by the Group, and that will probably generate economic benefits, are recognised as intangible assets. Costs include software development employee costs and an appropriate portion of relevant overheads. Computer software development costs recognised as assets are amortised over their estimated useful lives (not exceeding five years). Intangible assets acquired in a business combination Intangible assets acquired in a business combination are identified and recognised separately from goodwill where they meet the definition of an intangible asset and their fair value can be measured reliably. Cost of such intangible assets is the fair value at the acquisition date. Subsequent to initial recognition, intangible assets acquired in a business combination are reported at cost less accumulated amortisation and any accumulated impairment losses, on the same basis as intangible assets acquired separately. Mining assets Development costs incurred to evaluate and develop new ore bodies, or to define mineralization in existing ore bodies, or to establish or expand productive capacity or to maintain production are capitalized. Mine development costs are capitalized to the extent they provide probable access to mine bearing reefs, have future economic benefits and they are attributable to an area of interest or those that can be reasonably allocated to the area of interest. Development costs include sinking shafts, construction of underground galleries, roads and tunnels. Where revenue from mine sales is recognised in the statements of comprehensive income, costs incurred during commissioning period which are directly attributable to developing the operating capability of the mine, are capitalized and only the costs that represent costs of producing mine is recognised in the statement of comprehensive income. In cases where it is difficult to separate the research phase from the development phase in a project, the entire project is treated as research and recorded as expense to the statement of income. 34

39 3. Significant accounting policies (continued) 3.18 Intangible assets (continued) Mining assets (continued) The depreciation starts when the asset is in the location and condition necessary for it to be capable of operating in the manner intended by the management. Development costs incurred during the production phase are capitalized and depreciated to the extent that they have future economic benefits. The development cost is allocated at initial recognition to its significant components and each component is depreciated separately by units of production method, considering the attributable area of interest. The major overhauls that extend the future economic benefits throughout the life of mine are capitalized as future benefits will flow to the Group. Other than major overhauls, repairs are expensed as incurred. Depreciation and amortisation of development costs are calculated principally by the units of production method based on estimated proven and probable reserves of attributable area of interests. In accordance with the unit of production method, the depreciation charge of development costs are calculated by dividing the number of tons of ore extracted during the period to the remaining proven and probable mine reserves in terms of tons for attributable area of interest. To the extent that these costs benefit the entire ore body or area of interest, they are amortised over the estimated life of the ore body or area of interest. Proven and probable ore reserves reflect estimated quantities of economically recoverable reserves which can be recovered in future from known mineral deposits in the attributable area of interest. Mineral and surface rights are recorded at acquisition cost and amortised principally by the units of production method based on estimated proven and probable reserves. In accordance with the unit of production method, the amortisation charge of mineral and surface rights are calculated by dividing the amount of ore extracted during the period to the remaining proven and probable mine reserves in terms of ton. Development costs Costs incurred on development projects relating to the design and testing of new or improved products are recognised as intangible assets when it is probable that the project will be a success considering its commercial and technological feasibility, and only if the cost can be measured reliably. Other development expenditures are recognised as an expense as incurred. Development expenditures previously recognised as an expense are not recognised as an asset in a subsequent period. Development costs that have been capitalized are amortised from the commencement of the commercial production of the product on a straight-line basis in five years Non-current assets held for sale Certain non-current assets primarily related to the collateral collected on non-performing loans are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset is available for immediate sale in its present condition. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification. Non-current assets classified as held for sale are measured at the lower of carrying value and fair value less costs to sell. 35

40 3. Significant accounting policies (continued) 3.20 Impairment of non-financial assets The carrying amounts of the Group s non-financial assets, other than deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists then the asset s recoverable amount is estimated. Goodwill and indefinite-lived intangible assets are tested annually for impairment or more often if there are indications of impairment. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or cash-generating units. The goodwill acquired in a business combination, for the purpose of impairment testing, is allocated to cash-generating units that are expected to benefit from the synergies of the combination. An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its estimated recoverable amount. Impairment losses are recognised in profit or loss. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the cash-generating units and then to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis. An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised Leases The Group as the lessee Operating leases Leases where a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the statement of income on a straight-line basis over the term of the lease. Finance leases Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. Minimum lease payments made under finance leases are apportioned between the finance expense and the reduction of the outstanding liability. The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Capitalised leased assets are depreciated over the estimated useful life of the asset. 36

41 3. Significant accounting policies (continued) 3.21 Leases (continued) The Group as the lessor Operating leases Assets leased out under operating leases are included in property, plant and equipment in the consolidated financial statements. They are depreciated over their expected useful lives on a basis consistent with similar owned property, plant and equipment. Rental income is recognised in the consolidated statement of income on a straight-line basis over the lease term. Finance leases When the Group is the lessor in a lease agreement that transfers substantially all of the risks and rewards incidental to ownership of the asset to the lessee, the arrangement is classified as a finance lease and a receivable equal to the net investment in the lease is recognised and presented within loans and advances Financial liabilities Financial liabilities and equity instruments issued by the Group are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability and an equity instrument. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. Financial liabilities are classified as either equity instruments or other financial liabilities. Equity instruments Equity instruments issued by the Group are recorded at the proceeds received, net of direct issue costs. Financial liabilities related with non-controlling interest shares put options are reflected to financial statements in conformity with their discounted value with their own redemption plan. Discounted value of the financial liability which is the subject of the put option is assumed as the fair value of the financial asset. Other financial liabilities Other financial liabilities, including borrowings, deposits, debt securities issued and subordinated liabilities are the Group s sources of debt funding. Borrowings, deposits, debt securities issued and subordinated liabilities are initially measured at fair value plus incremental direct transaction costs, and subsequently measured at their amortised cost using the effective interest method. When the Group sells a financial asset and simultaneously enters into an agreement to repurchase the asset (or a similar asset) at a fixed price on a future date, the arrangement is accounted for as an obligation under repurchase agreement, and the underlying asset continues to be recognized in the Group s financial statements. Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are capitalized as part of the cost of that asset in the period in which the asset is prepared for its intended use or sale. All other borrowing costs are recognised in profit or loss in the period in which they are incurred. 37

42 3. Significant accounting policies (continued) 3.23 Provisions A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. A provision for restructuring is recognised when the Group has approved a detailed and formal restructuring plan, and the restructuring either has commenced or has been announced publicly. Future operating costs are not provided for Employee benefits Pension and other post-retirement obligations A defined benefit plan is a pension plan that defines an amount of pension benefit that an employee and his / her dependants will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation. Pension fund transferable to Social Security Institution Employees of the Bank are members of Türkiye İş Bankası A.Ş. Mensupları Emekli Sandığı Vakfı, employees of Milli Reasürans are members of Milli Reasürans Türk Anonim Şirketi Emekli ve Sağlık Sandığı Vakfı, employees of TSKB are members of Türkiye Sınai Kalkınma Bankası Memur ve Müstahdemleri Yardım ve Emekli Vakfı and employees of Anadolu Sigorta are members of Anadolu Anonim Türk Sigorta Şirketi Memurları Emekli Sandığı (collectively the Funds ), which are established in accordance with the temporary Article 20 of the Social Security Act No: 506 and separate legal entities and foundations recognised by an official decree, providing all qualified employees with pension and postretirement benefits. As explained in Note 29, the Bank expects to transfer the obligation of the Funds to Social Security Institution. This transfer will be a settlement of the Funds obligation. Final legislation establishing the terms for such transfer was enacted on 8 May Although the settlement will not be recognised until the transfer is made, the Group believes that it is more appropriate to measure the obligation at 31 December 2014 as the value of the payment that would need to be made to Social Security Institution to settle the obligation at the date of the statement of financial position in accordance with the new law Amendments to the Social Security and General Health Insurance Act Including Certain Laws and Decrees. The pension disclosures set out in Note 29, therefore reflect the actuarial assumptions and mortality tables specified in the new law, including a discount rate of 9.8%. The pension benefits transferable to Social Security Institution are calculated annually by an independent actuary, who is registered with the Undersecretariat of the Treasury. Retirement pay liability In accordance with the existing labour law in Turkey, the Group entities operating in Turkey are required to make lump-sum payments to employees who have completed one year of service and whose employment is terminated without cause or who retire, are called up for military service or die. Such payments are calculated on the basis of 30 days' pay maximum of pay ceiling announced by the Government per year of employment at the rate of pay applicable at the date of retirement or termination. Reserve for retirement pay is computed and reflected in the consolidated financial statements on a current basis. The management of the Group used some assumptions (detailed in Note 29) in the calculation of the retirement pay provision. 38

43 3. Significant accounting policies (continued) 3.24 Employee benefits (continued) Short-term benefits Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A provision is recognised for the amount expected to be paid under short-term cash bonus if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably Trade and other payables Trade payables are payments to be made arising from the purchase of goods and services from suppliers within the ordinary course of business. Trade and other payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method Income tax Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognised in profit or loss except to the extent that it relates to items recognised directly in equity or in other comprehensive income. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for the following temporary differences: the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss, and differences relating to investments in subsidiaries to the extent that it is probable that they will not reverse in the foreseeable future. In addition, deferred tax is not recognised for taxable temporary differences arising on the initial recognition of goodwill. The measurement of deferred tax reflects the tax consequences that would follow the manner in which the Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously. A deferred tax asset is recognised for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised. The Turkish tax legislation does not permit a parent company and its subsidiaries to file a consolidated tax return. Therefore, provisions for taxes, as reflected in the accompanying consolidated financial statements, have been calculated on a separate-entity basis. 39

44 3. Significant accounting policies (continued) 3.27 Insurance and reinsurance businesses Through its insurance and reinsurance subsidiaries, the Group enters into contracts that contain insurance risk. An insurance contract is a contract under which the Group accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder. Insurance risk covers all risks except for financial risks. Reinsurance risk is defined as a possibility of financial loss due to inappropriate and insufficient application of reinsurance techniques in the activities of taking insurance contract responsibility partially or completely. Investment contracts are those contracts which transfer financial risk without significant insurance risk. Financial risk is the risk of a possible future change in a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index or other variable, provided, that it is not specific to a party to the contract, in the case of a non-financial variable. Insurance and investment contracts issued/signed by the insurance and reinsurance subsidiaries are accounted for as follows: Earned premiums: For short-term insurance contracts, premiums are recognised as revenue, net of premiums ceded to reinsurance firms, proportionally over the period of coverage. The portion of premium received on in-force contracts that relates to unexpired risks at reporting date is recognised as the reserve for unearned premiums that are calculated on a daily pro-rata basis. Premiums are shown before deduction of commissions given or received and deferred acquisitions costs, and are gross of any taxes and duties levied on premiums. For long-term insurance contracts, premiums are recognised as revenue when the premiums are due from the policyholders. Earned premiums, net of amounts ceded for reinsurance are recorded under income from insurance operations in the accompanying consolidated statement of income. Premium received for an investment contract is not recognised as revenue. Premiums for such contracts are recognised directly as liabilities. Reserve for unearned premiums: The reserve for unearned premiums represents the proportions of the premiums written in a period that relate to the period of risk subsequent to the reporting date, without deductions of commission or any other expense. Reserve for unearned premiums is calculated for all contracts except for the insurance contracts for which the Group provides actuarial provisions. The reserve for unearned premiums is also calculated for the annual premiums of the annually renewed long-term insurance contracts. The reserve for unearned premiums is presented under insurance contract liabilities in the accompanying consolidated statement of financial position. Long term insurance contracts: Long term insurance contracts are the provisions recorded against the liabilities of the Group to the beneficiaries of long-term life, health and individual accident policies based on actuarial assumptions. Long term insurance contracts are calculated as the difference between the net present values of premiums written in return of the risk covered by the Group and the liabilities to policyholders for long-term insurance contracts based on the basis of actuarial mortality assumptions as approved by the Republic of Turkey Prime Ministry Undersecretariat of Treasury, which are applicable for all Turkish insurance companies. Long term insurance contracts are presented under insurance contract liabilities in the accompanying consolidated financial statements. 40

45 3. Significant accounting policies (continued) 3.27 Insurance and reinsurance businesses (continued) Investment contracts: Premiums received for such contracts are recognised directly as liabilities under investment contract liabilities. These liabilities are increased by bonus rate calculated by the Group and are decreased by policy administration fees, mortality and surrender charges and any withdrawals. Profit sharing reserves are the reserves provided against income obtained from asset backing investment contracts. These contracts entitle the beneficiaries of those contracts to a minimum guaranteed crediting rate per annum or, when higher, a bonus rate declared by the Group from the eligible surplus available to date. Deferred acquisition cost and deferred commission income: Commissions and other acquisition costs given to the intermediaries that vary with and are related to securing new contracts and renewing existing insurance contracts are capitalized as deferred acquisition cost. Deferred acquisition costs are amortised on a straight-line basis over the life of the contracts. Deferred acquisition costs are presented under other assets in the accompanying consolidated financial statements. Commission income obtained against premiums ceded to reinsurance firms are also deferred and amortised on a straight-line basis over the life of the contracts. Deferred commission income is presented under other liabilities and provisions in the accompanying consolidated financial statements. Liability adequacy test: At each reporting date, a liability adequacy test is performed, to ensure the adequacy of unearned premiums net of related deferred acquisition costs. In performing the test, current best estimates of future contractual cash flows, claims handling and policy administration expenses are taken into consideration. Any deficiency is immediately charged to the consolidated statement of comprehensive income. If the result of the test is that a loss is required to be recognised, the first step is to reduce any intangible item arising from business combinations related to insurance. If there is still a loss remaining, then the deferred acquisition cost is reduced to the extent that expense loadings are considered not recoverable. Finally, if there is a still remaining amount of loss, this should be booked as an addition to the reserve for premium deficiency. Income generated from pension business: Revenue arising from asset management and other related services offered by the insurance affiliate of the Bank are recognised in the accounting period in which the service is rendered. Fees consist primarily of investment management fees arising from services rendered in conjunction with the issue and management of investment contracts where the company actively manages the consideration received from its customers to fund a return that is based on the investment profile that the customer selected on origination of the instrument. These services comprise the activity of trading financial assets in order to reproduce the contractual services. In all cases, these services comprise an indeterminate number of acts over the life of the individual contracts. Claims are recorded in the year in which they occur, based on reported claims or on the basis of estimates when not reported. Provision for outstanding claims represents the estimate of the total reported costs of notified claims on an individual case basis at the reporting date as well as the corresponding handling costs. Incurred but not reported ( IBNR ) claims are also provided. Claims incurred before the accounting periods but reported subsequent to those dates are considered as IBNR claims. Reserve for outstanding claims: The reserve for outstanding claims represents the estimate of the total reported costs of notified claims on an individual case basis at the reporting date as well as the corresponding handling costs. A provision for claims IBNR is also established as described below. In the accompanying consolidated financial statements, reserve for outstanding claims is presented gross of amounts recoverable from reinsurers. Estimates have to be made both for the expected ultimate cost of claims reported at the reporting date and for the expected ultimate cost of IBNR claims at the reporting date. It can take a significant period of time before the ultimate claims cost can be established with certainty. The primary technique adopted by management in estimating the cost of IBNR claims, is that of using past claim settlement trends to predict future claims settlement trends. At each reporting date, prior year claims estimates are reassessed for adequacy and changes are made to the provision. 41

46 3. Significant accounting policies (continued) 3.27 Insurance and reinsurance businesses (continued) In addition to that, the Group also reassesses its notified claims provision at each reporting date on each claim file basis. General insurance claims provisions are not discounted for the time value of money. The reserve for outstanding claims is not discounted for the time value of money. The reserve for outstanding claims is presented under insurance contract liabilities in the accompanying consolidated statement of financial position Construction contracts Contract costs are recognised as expenses in the period in which they are incurred. When the outcome of a construction contract cannot be estimated reliably, contract revenue is recognised only to the extent of contract costs incurred that are likely to be recoverable. When the outcome of a construction contract can be estimated reliably and it is probable that the contract will be profitable, contract revenue is recognised over the period of the contract. When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised as an expense immediately. Variations in contract work, claims and incentive payments are included in contract revenue to the extent that may have been agreed with the customer and are capable of being reliably measured. The Group uses the percentage-of-completion method to determine the appropriate amount to recognise in a given period. The stage of completion is measured by reference to the contract costs incurred up to the end of the reporting period as a percentage of total estimated costs for each contract. Costs incurred in the year in connection with future activity on a contract are excluded from contract costs in determining the stage of completion. They are presented as inventories, prepayments or other assets, depending on their nature. The Group presents as an asset the gross amount due from customers for contract work for all contracts in progress for which costs incurred plus recognised profits (less recognised losses) exceed progress billings. Progress billings not yet paid by customers and retention are included within other assets. The Group presents as a liability the gross amount due to customers for contract work for all contracts in progress for which progress billings exceed costs incurred plus recognised profits (less recognised losses) under other liabilities Government grants Grants from the government are recognised at fair value where there is a reasonable assurance that the grant will be received and the Group will comply with all the required conditions (Note 45). Government grants related to costs are accounted as income on a consistent basis over the related periods with the matching costs. Government grants relating to property, plant and equipment are included in non-current liabilities as deferred government grants and are credited to the statement of income on a straight-line basis over the expected lives of the related assets. Expenses regarding industries having research and development quality projects which were qualified by expert organizations are reviewed and evaluated so that specific proportion of these expenses are considered as grants or are given support on the condition of payback within the context of the decision no: 94/6401 made on the government grants for exporting activities in accordance with the Money Credit Coordination Board s Communiqué No: 98/10 on Research and Development Grants published by the Under Secretariat of Foreign Trade based on the decision no: 98/16 made as at 9 September Exporting activities and other foreign currency generating operations, within the scope of the standards determined by the Ministry of Finance and Undersecretaries of Foreign Trade, are exempt from stamp tax and fees. Government grants are paid to support participating in international fairs in accordance with the decision No: 2004/11 of the Money Credit and Coordination Committee issued at 16 December

47 3. Significant accounting policies (continued) 3.30 Items held in trust Assets, other than cash deposits, held by the Group in fiduciary or agency capacities for their customers and government entities are not included in the accompanying consolidated statement of financial position, since such items are not the assets of the Group Earnings per share Earnings per share from continuing operations disclosed in the accompanying consolidated statement of income is determined by dividing the net profit for the period by the weighted average number of shares outstanding during the period attributable to the shareholders of the Bank. In Turkey, companies can increase their share capital by making a pro-rata distribution of shares ( Bonus Shares ) to existing shareholders from retained earnings. For the purpose of earnings per share computations, such Bonus Shares issued are regarded as issued shares Events after the reporting period Events after the reporting period that provide additional information about the Group s position at the reporting dates (adjusting events) are reflected in the consolidated financial statements. Events after the reporting period that are not adjusting events are disclosed in the notes when material Segment reporting An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group s other components, whose operating results are reviewed regularly by the Board of Directors (being chief operating decision maker) to make decisions about resources allocated to each segment and assess its performance, and for which discrete financial information is available Onerous contracts A contract is considered onerous when the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received by the Group. Present obligations arising under onerous contracts are measured and recognized as a provision. Possible assets or obligations that arise from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Group are not included in the consolidated financial statements and treated as contingent assets or liabilities. 43

48 3. Significant accounting policies (continued) 3.35 New standards and interpretations not yet adopted A number of new standards, amendments to standards and interpretations are not yet effective for annual periods beginning after 1 January 2014, and the Group has not applied the following new or amended standards in preparing these consolidated financial statements. IFRS 9 Financial Instruments (2014) IFRS 9, published in July 2014, replaces the existing guidance in IAS 39 Financial Instruments Recognition and Measurement. IFRS 9 includes revised guidance on the classification and measurement of financial instruments including a new expected credit loss model for calculating impairment on financial assets, and the new general hedge accounting requirements. It also carries forward the guidance on recognition and derecognition of financial instruments from IAS 39. IFRS 9 is effective for annual reporting periods beginning on or after 1 January 2018, with early adoption permitted. Given the nature of the Group s operations, this standard is expected to have a pervasive impact on the Group s financial statements. In particular, calculation of impairment of financial instruments on an expected credit loss basis is expected to result in a change in the overall level of impairment allowances. The Group is assessing the potential impact on its consolidated financial statements resulting from the application of IFRS 9. Improvements to IFRSs The IASB issued Annual Improvements to IFRSs Cycle. The amendments are effective as of 1 January Earlier application is permitted. The Group does not expect that these amendments will have significant impact on the financial position or performance of the Group. Annual Improvements to IFRSs Cycle IFRS 5 Non-current Assets Held for Sale and Discontinued Operations The amendments clarify the requirements of IFRS 5 when an entity changes the method of disposal of an asset (or disposal group) and no longer meets the criteria to be classified as held-for-distribution. IFRS 7 Financial Instruments: Disclosures IFRS 7 is amended to clarify when servicing arrangement are in the scope of its disclosure requirements on continuing involvement in transferred financial assets in cases when they are derecognized in their entirety. IFRS 7 is also amended to clarify that the additional disclosures required by Disclosures: Offsetting Financial Assets and Financial Liabilities (Amendments to IFRS 7). IAS 19 Employee Benefits IAS 19 has been amended to clarify that high-quality corporate bonds or government bonds used in determining the discount rate should be issued in the same currency in which the benefits are to be paid. IAS 34 Interim Financial Reporting IAS 34 has been amended to clarify that certain disclosure, if they are not included in the notes to interim financial statements, may be disclosed elsewhere in the interim financial report i.e. incorporated by cross-reference from the interim financial statements to another part of the interim financial report (e.g. management commentary or risk report). 44

49 3. Significant accounting policies (continued) 3.35 New standards and interpretations not yet adopted (continued) IFRS 14 Regulatory Deferral Accounts IASB has started a comprehensive project for Rate Regulated Activities in As part of the project, IASB published an interim standard to ease the transition to IFRS for rate regulated entities. The standard permits first time adopters of IFRS to continue using previous GAAP to account for regulatory deferral account balances. The interim standard is effective for financial reporting periods beginning on or after 1 January 2016, although early adoption is permitted. The Group does not expect that these amendments will have significant impact on the financial position of the Group. Amendments to IFRS 11 Accounting for Acquisition of Interests in Joint Operations Amendments, is effective for annual periods beginning on or after 1 January This amendment adds new guidance on how to account for the acquisition of an interest in a joint operation that constitutes a business. The amendments specify the appropriate accounting treatment for such acquisitions. Amendments to IAS 16 and IAS 38 Clarification of Acceptable Methods of Depreciation and Amortisation Amendments is effective for annual periods beginning on or after 1 January In this amendment the IASB has clarified that the use of revenue based methods to calculate the depreciation of an asset is not appropriate because revenue generated by an activity that includes the use of an asset generally reflects factors other than the consumption of the economic benefits embodied in the asset. IFRS 15 Revenue from Contracts with Customers IFRS 15, Revenue from contracts with customers, is effective for annual periods beginning on or after 1 January 2017, with early adoption permitted. The objective of this Standard is to establish the principles that an entity shall apply to report useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from a contract with a customer. The new model employs an asset and liability approach, rather than current revenue guidance focuses on an earnings process. 45

50 4. Financial risk management 4.1 Introduction and overview The Group has exposure to the following risks from its use of financial instruments: credit risk, liquidity risk, market risks, operational risks. This note presents information about the Group s exposure to each of the risks below, the Group s objectives, policies and processes for measuring and managing risk, and the Group s management of capital. Risk management framework The Board of Directors of the Bank has overall responsibility for the establishment and oversight of the Group s risk management framework. The Board of Directors monitors the effectiveness of the risk management system through the Audit Committee. Consequently, the Risk Management Department of the Bank, which carries out the risk management activities and works independently from executive activities, report to the Board of Directors. The Group s risk management policies are established to identify and analyse the risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions, products and services offered. The Group, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment, in which all employees understand their roles and obligations. The risks are measured using internationally accepted methodologies, in compliance with local and international regulations, and the Bank s structure, policy and procedures. It is aimed to develop these methodologies to enable the Bank to manage the risks effectively. At the same time, studies for compliance with the international banking applications are carried out. Audit Committee: The Audit Committee consists of two members of the Board of Directors who do not have any executive functions. The Audit Committee, established to assist the Board of Directors in its auditing and supervising activities, is responsible for: The supervision of the efficiency and effectiveness of the internal control, risk management and internal audit systems of the Group, functioning of these systems as well as accounting and reporting systems within the framework of related procedures, and the integrity of information generated; The preliminary assessment on the selection process of independent audit firms and the systematic monitoring of the activities of these companies; The maintenance and coordination of the internal audit functions of corporations subject to consolidated internal audits. 46

51 4. Financial risk management (continued) 4.1 Introduction and overview (continued) The Group s strategy for the use of financial instruments The Group s main activities comprise private, retail, commercial and corporate banking, money market, securities market operations and activities related to international banking services, as well as insurance, leasing and manufacturing operations. Parallel to the general liability structure of the system, the Group s liabilities are composed of short-term deposits and other middle and long-term resources. The liquidity risk, which may be caused by this status, can easily be controlled through deposit sustainability, as well as widespread network of correspondent banks, market maker status (the Bank is one of the market maker banks) and by the use of liquidity facilities of the Central Bank of Turkey. In this regard, the liquidity of the Group is constantly monitored. On the other hand, demand for foreign currency liquidity is met by money market operations and money swaps. Since major part of the loans in the asset side is flexible enough to reflect the volatility in the market interest rates to the customers, the interest rate risk is kept at minimum level. High yielding Eurobond and government debt securities have sufficient quality and capacity to reduce the risk which may be caused by the fluctuations in the interest rates. Funds collected are, to a great extent, fixed-interest rated. Sectoral developments are closely monitored and both fixed and floating rated placements are made according to the yields of alternative investment instruments. Some part of the funds is transferred to the Treasury guaranteed projects. In terms of placements, security principle has always been the priority of the Bank and the placements are oriented to high yielding and low risk assets by considering their maturity structure. Accordingly, a pricing policy that aims high return is implemented in long-term placements. Placements to loans and marketable securities are the fields with higher yields than the average return calculated for the Group s field of activities. The Group determines its lending strategy by taking into consideration the international and national economic data and expectations, market conditions, current and potential credit customers expectations and tendencies, and the risks like interest rate, liquidity, currency and credit risks. Furthermore, parallel to this strategy, the Group acts within the legal limits in terms of asset-liability management. Main growth targets for different asset classes are set by long-term plans, which are shaped along with budgeting; and the bank takes necessary position in accordance with the said plans and the course of the market conditions against the short-term currency, interest rates and price movements. Foreign currency, interest rate and price movements are monitored instantaneously. When taking position, the Group s own transaction and control limits are also effectively monitored in addition to the legal limits and limit overrides are avoided. Besides the Bank s asset-liability management is executed by the Asset- Liability Management Committee, within the risk limits determined by the Risk Committee, in order to keep the liquidity risk (within the boundaries of the equity), interest rate risk, currency risk and credit risk within certain limits and to maximize profitability. 47

52 4. Financial risk management (continued) 4.2 Credit risk Credit risk is defined as the probability of loss if the customer or counterparty fails to meet its obligations partially or completely on the terms set. Credit risk is considered in depth, covering the counterparty risks arising from not only from loans and debt securities but also credit risks originating from the transactions defined as loans in the Banking Law. For risk management reporting purposes the Group considers and consolidates all elements of credit risk exposure. Management of credit risk For credit risk management purposes the Risk Management Department is involved in the determination of credit risk policies in coordination with the Bank s other units, the determination and monitoring of the distribution of concentration limits with respect to sector, geography and credit type, contribution to the formation of rating and scoring systems, submitting to the Board of Directors and the senior management not only credit risk management reports about the credit portfolio s distribution (borrower, sector, geographical region), credit quality (impaired loans, credit risk ratings) and credit concentration, but also scenario analysis reports, stress tests and other analyses, and studies regarding the formation of advanced credit risk measurement approaches. Exposure to credit risk Loans and advances to customers Trade receivables Other assets expose to credit risk (*) Individually impaired 2,872,026 2,629,472 54,148 42, , ,619 Allowance for specific impairment (1,641,029) (1,401,941) (54,148) (42,753) (141,526) (136,619) Carrying amount 1,230,997 1,227, Past due but not impaired 1,227,421 1,096, , , ,099 94,521 Carrying amount 1,227,421 1,096, , , ,099 94,521 Neither past due nor impaired 163,915, ,060,088 1,813,074 1,897, ,324, ,547,528 Financial assets with renegotiated terms 5,370,967 4,742, Carrying amount 169,285, ,802,755 1,813,074 1,897, ,324, ,547,528 Portfolio allowance for impairment on loans (1,398,347) (1,263,299) Total carrying amount 170,346, ,863,072 2,001,207 2,125, ,430, ,642,049 (*) Non-cash loans, commitments convertible to loans and derivative transactions are also included. As at 31 December 2014 and 2013, the Group has no allowance for loans and advances to banks. 48

53 4. Financial risk management (continued) 4.2 Credit risk (continued) The disclosures set out in the tables below include financial assets and financial liabilities that: are offset in the Group s statement of financial position; or are subject to an enforceable master netting arrangement or similar agreement that covers similar financial instruments, irrespective of whether they are offset in the statement of financial position. The similar agreements include derivative clearing agreements. Similar financial instruments include derivatives. Financial instruments such as loans and deposits are not disclosed in the tables below unless they are offset in the statement of financial position. Such collateral is subject to each agreement terms. The terms also give each party the right to terminate the related transactions on the counterparty s failure to post collateral. The Group receives and gives collateral in the form of cash in respect of the derivative transactions Financial assets and liabilities subject to offsetting, enforceable master netting arrangements and similar agreements Related amounts not offset in the statement of financial position Types of financial assets Gross amounts of recognised financial assets Gross amounts of recognised financial liabilities offset in the statement of financial position Net amounts of financial assets presented in the statement of financial position Financial instruments (including noncash collateral) Cash collateral received Net amount 31 December December 2013 Derivatives - trading assets 1,165, ,165, ,165, Derivatives - trading assets 1,288, ,288, ,288, Related amounts not offset in the statement of financial position Types of financial liabilities Gross amounts of recognised financial liabilities Gross amounts of recognised financial liabilities offset in the statement of financial position Net amounts of financial assets presented in the statement of financial position Financial instruments (including noncash collateral) Cash collateral received Net amount 31 December December 2013 Derivatives - trading liabilities 749, , , Derivatives - trading liabilities 1,201, ,201, ,201,

54 4. Financial risk management (continued) 4.2 Credit risk (continued) The aging analysis of the loans past due but not impaired is as follows: Up to 30 days 837, , days 270, , days 118,079 97, days and above 1,018 2,282 Impaired loans and receivables 1,227,421 1,096,085 Impaired loans and receivables are loans and receivables for which the Group determines that it is probable that it will be unable to collect all principal and interest due according to the contractual terms of the loan agreements. These loans are graded 3 to 5 in the Group s internal credit risk grading system which is also in line with the regulations of BRSA. Past due but not impaired loans Loans and receivables where contractual interest or principal payments are past due but the Group believes that impairment is not appropriate on the basis of the level of security / collateral available and / or the stage of collection of amounts owed to the Group. Loans with renegotiated terms Loans with renegotiated terms are loans that have been restructured due to temporary deterioration in the borrower s financial position and where the Group has made concessions that it would not otherwise consider. Allowances for impairment The Group establishes an allowance for impairment losses that represents its estimate of incurred losses in its loan portfolio. The main components of this allowance are a specific loss component that relates to individually significant exposures, and a collective loan loss allowance established for groups of homogeneous assets in respect of losses that have been incurred but have not been identified on loans subject to individual assessment for impairment. Write-off policy The Group writes off a loan/security balance (and any related allowances for impairment losses) when it is concluded that the loans/securities are uncollectible after all the necessary legal procedures has been completed, and the final loss has been determined. This conclusion is reached after considering information such as the occurrence of significant changes in the borrower/issuer s financial position such that the borrower/issuer can no longer pay the obligation, or that proceeds from collateral will not be sufficient to pay back the entire exposure. 50

55 4. Financial risk management (continued) 4.2 Credit risk (continued) Sectoral distribution of the performing loans and advances to customers Consumer loans 33,591,907 28,905,332 General purpose loans 16,734,704 13,512,503 Mortgage loans 13,600,111 11,924,662 Auto loans 951,681 1,312,758 Overdraft checking accounts 451, ,945 Other consumer loans 1,853,654 1,826,464 Manufacturing 44,284,847 37,356,172 Wholesale and retail trade 23,629,816 20,512,557 Financial institutions 13,928,783 6,281,615 Credit cards 10,621,357 11,019,640 Construction 10,105,518 10,490,710 Transportation and telecommunication 7,621,401 9,130,373 Hotel, food and beverage services 5,164,963 3,910,616 Agriculture and stockbreeding 1,713,802 1,801,396 Health and social services 1,376,854 1,036,697 Others 18,474,158 16,453,732 Total performing loans and advances to customers 170,513, ,898,840 Sectoral distribution of the non-cash loans Manufacturing 19,909,706 18,655,836 Wholesale and retail trade 8,848,410 6,862,101 Construction 6,334,798 5,807,195 Financial institutions 3,280,025 1,500,266 Transportation and telecommunication 1,845,697 1,965,957 Real estate and rental services 1,385,034 1,258,206 Self-employed services 559, ,329 Hotel, food and beverage services 240, ,989 Health and social services 223, ,011 Agriculture and stockbreeding 156, ,637 Others 1,878,545 2,555,525 Total 44,663,313 39,770,052 Factoring receivables based on types of factoring transactions Domestic irrevocable 667, ,981 Domestic revocable 519, ,489 Foreign revocable 218, ,113 Foreign irrevocable 11,166 11,967 Factoring receivables 1,416, ,550 51

56 4. Financial risk management (continued) 4.2 Credit risk (continued) Leased equipment allocation of finance lease receivables is as follows: 2014 (%) 2013 (%) Real estate Machinery and equipment Building and construction machinery Air transportation equipments Sea transport vessels Textile machinery Medical equipment Electronic and optical equipment Printing machinery Tourism equipment Road transportation equipments Office equipments Other Set out below is an analysis of the gross and net (of allowances for impairment) amounts of individually impaired assets by risk grade Loans and advances to Trade receivables Other assets customers Gross Net Gross (*) Net (*) Gross (*) Net (*) Grade 3 : Individually Impaired 384, , Grade 4 : Individually Impaired 533, , Grade 5 : Individually Impaired 1,954, ,220 54, , Total 2,872,026 1,230,997 54, , Loans and advances to Trade receivables Other assets customers Gross Net Gross (*) Net (*) Gross (*) Net (*) Grade 3 : Individually Impaired 292, , Grade 4 : Individually Impaired 498, , Grade 5 : Individually Impaired 1,838, ,402 42, , Total 2,629,472 1,227,531 42, , (*) Impaired insurance receivables, trade receivables and securities portfolio consist of non-rated customers which are presented as Grade 5 in above table. Collateral policy The Group give utmost importance to ensure that loans are furnished with collaterals. Most of the loans extended are collateralized by establishing pledge over real estate, movable or commercial enterprise, holding promissory notes and other liquid assets as collateral, or by acceptance of letters of guarantee and individual or corporate guarantees. Estimates of fair value are based on the value of collateral assessed at the time of borrowing, and generally are not updated except when a loan is individually assessed as impaired. Collateral generally is not held over loans and advances to banks, except when securities are held as part of reverse repurchase and securities borrowing activity. Collateral usually is not held against investment securities, and no such collateral was held at 31 December 2014 and

57 4. Financial risk management (continued) 4.2 Credit risk (continued) An estimate of the fair value of collateral and other security enhancements held against closely monitored loans and advances to customers as follows: Secured closely monitored loans: 2,053,940 1,381,195 Secured by mortgages(*) 895, ,341 Vehicle pledge 103, ,640 Secured by cash collateral 268, ,741 Other (surety, commercial enterprise under pledge etc.) 787, ,473 Unsecured closely monitored loans 834, ,323 Total closely monitored loans and advances to customers 2,888,091 2,236,518 (*) The mortgage and/or pledge amounts on which third parties have priorities are deducted from the fair value of the real estate provided in expertise reports. This net value is compared to loan balance and mortgage amount, and lowest of the three values is presented here as collateral s fair value. As at 31 December 2014 and 2013, the Group has no closely monitored loans and advances to banks, investment securities, trade receivables or other assets. An estimate of the fair value of collateral held against non-performing loans and advances to customers is as follows: Secured non-performing loans 523, ,339 Secured by cash collateral(*) 213 2,235 Secured by mortgages 375, ,738 Vehicle pledge 84,369 86,766 Other (surety, commercial enterprise under pledge etc.) 63,425 72,600 Unsecured non-performing loans 2,348,058 2,017,133 Total 2,872,026 2,629,472 (*) The mortgage and/or pledge amounts on which third parties have priorities are deducted from the fair value of the real estate provided in expertise reports. This net value is compared to loan balance and mortgage amount, and lowest of the three values is presented here as collateral s fair value. Guarantees received from the customers for trade receivables are as follows: Letters of guarantee 194, ,306 Notes and bills 170, ,809 Mortgages 15,294 20,625 Others 8,074 8,283 Total 388, ,023 53

58 4. Financial risk management (continued) 4.2 Credit risk (continued) As of 31 December 2014, TL 188,133 (31 December 2013: TL 228,392) of trade receivable amount was past due but not impaired. This relate to a various number of independent customers with no recent history of default. The aging analysis of trade receivable amounts is as follows: Up to 1 month 124, , months 36,596 45, months 15,715 30, years 11,365 13, , ,392 Rating system Credit risk limits of customers are determined depending on the financial situation and loan requirements of the borrowers, in strict compliance with the relevant banking legislation, within the framework of loan authorization limits of Branches, Regional Offices, Loan Divisions, and the Deputy Chief Executives responsible for loans, the CEO, the Credit Committee and the Board of Directors. These limits may be changed as may be deemed necessary by the Bank. Moreover, all commercial credit limits are revised periodically, provided that each period does not exceed a year. Furthermore, the borrowers and borrower groups forming a large proportion of the overall loan portfolio are subject to risk limits in order to provide further minimization of potential risk. The rating/scoring results related to the cash commercial and corporate loans portfolio are classified as Strong, Standard and Below Standard by considering their default features. The loans whose borrowers capacity to fulfill their obligations is very good, are defined as Strong, whose borrowers capacity to fulfill its obligations in due time is reasonable, are defined as Standard and whose borrowers capacity to fulfill their obligations is poor, are defined as Below Standard. The percentage of the portfolio according to the rating/scoring results is as follows: 2014 (%) 2013 (%) Strong Standard Below standard Not rated / scored

59 4. Financial risk management (continued) 4.3 Liquidity risk Liquidity risk is the risk that the Group will encounter difficulty in meeting obligations from its financial liabilities. Management of liquidity risk Liquidity risk may arise as a result of funding long-term assets with short-term resources. Utmost care is taken to maintain the consistency between the maturities of assets and liabilities; strategies are used to acquire funds over longer terms. The Bank s main source of funding is deposits. While the average maturity of deposits is shorter than the average maturity of assets as a result of the market conditions, the Bank s wide network of branches and steady core deposit base are its most important safeguards of the supply of funds. The Bank also borrows medium and long-term funds from institutions abroad. In order to meet the liquidity requirements that may arise due to market fluctuations, the Group analyses TL and FC cash flows projections to preserve liquid assets. The term structure of TL and FC deposits, their costs and movements in the total amounts are monitored on a daily basis, also accounting for developments in former periods and expectations for the future. Based on cash flow projections, prices are differentiated for different maturities and thereby measures are taken to meet liquidity requirements; moreover liquidity that may be required for extraordinary circumstances is estimated and alternative liquidity sources are determined for possible utilization. Furthermore, foreign currency and total liquidity adequacy ratios, which are subject to weekly legal reporting and calculated separately for 7 and 31 days following the reporting date, and the liquidity adequacy ratios that are calculated based on the stress scenarios built internally by the Bank, are used effectively to manage the liquidity risk. Evaluated within the framework of the Bank s asset-liability management risk policy, the limits determined related to the liquidity risk management are monitored by the Risk Committee and to avoid extraordinary situations where a quick action should be taken due to the unfavorable market conditions, emergency measures and funding plans related to liquidity risk are put into effect. As per the Communiqué on Measurement and Assessment of the Adequacy of Banks Liquidity, the liquidity ratios that are measured for terms of 7 and 31 days should not be less than 80% and 100%, respectively. Foreign currency liquidity adequacy ratio means the ratio of foreign currency assets to foreign currency liabilities and the total liquidity adequacy ratio means the ratio of total assets to total liabilities. 55

60 4. Financial risk management (continued) 4.3 Liquidity risk (continued) Maturity analysis of financial assets and liabilities according to their remaining maturities: 2014 Demand Less than one month 1-3 months 3-12 months 1-5 Years Over 5 years Carrying amount Cash and cash equivalents 2,531, ,531,902 Balances with central bank 5,761,874 16,795, ,557,364 Loans and advances to banks 1,107,995 4,114,217 1,092, , ,504,828 Financial assets at fair value through profit or loss 391, , , , , ,418 2,267,013 Loans and advances to customers (*) 1,808,365 15,405,033 14,795,866 51,450,197 69,503,769 17,550, ,513,406 Trade receivables 763,167 34,226 1,196, , ,001,207 Insurance receivables 648, , , ,039 8, ,630,744 Available for sale investment securities 331, , ,602 2,175,800 17,934,853 24,231,918 45,676,771 Held to maturity investment securities -- 40, , , ,683 7,080 1,391,860 Other assets 1,631,936 1,106, ,777 1,128 47, ,029,086 Total assets 14,976,389 38,330,413 19,037,488 55,712,268 88,143,031 41,904, ,104,181 Deposits 30,053,445 70,206,595 23,476,408 6,651,242 1,447,442 1, ,836,478 Obligations under repurchase agreements -- 18,595, , ,153 1,083, ,011,731 Funds borrowed -- 2,414,713 2,834,754 12,169,394 11,918,143 7,280,267 36,617,271 Debt securities issued -- 1,733,938 2,701,821 4,012,801 6,581,395 4,701,637 19,731,592 Payables to stock exchange money market -- 2,291, ,291,363 Trade payables 877, , , ,271 6, ,374,759 Taxes and dues payable 2,780 17, , ,011 Corporate tax liability -- 2,190 32, , ,183 Insurance contract liabilities 4,880, , , , , ,894,351 Subordinated liabilities ,987 1,159,734 2,021,128 3,384,849 Other liabilities 126,247 5,421,929 1,177,727 1,019, ,848 35,990 7,956,823 Total liabilities 35,939, ,432,610 31,706,429 25,131,650 22,712,663 14,040, ,963,411 Net (20,963,302) (63,102,197) (12,668,941) 30,580,618 65,430,368 27,864,224 27,140,770 (*) Non-performing loans and allowance for impairment are not included. 56

61 4 Financial risk management (continued) 4.3 Liquidity risk (continued) Maturity analysis of financial assets and liabilities according to their remaining maturities (continued) 2013 Demand Less than one month 1-3 months 3-12 months 1-5 Years Over 5 years Carrying amount Cash and cash equivalents 2,194, ,194,664 Balances with central bank 6,079,490 15,056, , ,152,651 Loans and advances to banks 1,097,449 3,000,387 1,168, , ,572,863 Financial assets at fair value through profit or loss 171, , , , , ,533 2,913,514 Loans and advances to customers (*) 6,256,309 13,413,153 11,232,810 40,513,068 60,945,528 14,537, ,898,840 Trade receivables 803,087 88,516 1,211, , ,125,711 Insurance receivables 547, , , ,889 11, ,510,112 Available for sale investment securities 293, ,334 1,008,654 4,796,807 12,842,994 14,634,766 34,297,792 Held to maturity investment securities ,197 5,790,441 1,210,312 6,497 7,728,447 Other assets 1,521,741 1,589, ,305 7,659 37, ,417,260 Total assets 18,964,390 34,482,266 16,351,971 52,519,865 75,932,594 29,560, ,811,854 Deposits 26,090,910 65,261,124 19,609,632 8,479, ,008 18, ,001,979 Obligations under repurchase agreements -- 21,218,905 94, , , ,944 22,595,899 Funds borrowed -- 1,482,517 2,526,698 10,042,144 9,993,315 5,472,832 29,517,506 Debt securities issued -- 1,003,191 1,309,663 2,611,155 5,108,431 1,088,471 11,120,911 Payables to stock exchange money market -- 2,398,975 5, ,403,976 Trade payables 1,271, , , ,859 6, ,474,550 Taxes and dues payable -- 14, , ,425 Corporate tax liability , , ,640 Insurance contract liabilities 4,611, , , , , ,299,483 Subordinated liabilities , ,503 1,906,929 3,090,902 Other liabilities 40,267 4,134,142 1,505,994 2,468, ,174 35,990 8,363,308 Total liabilities 32,014,122 95,847,558 26,292,703 24,674,915 17,606,820 8,960, ,396,579 Net (13,049,732) (61,365,292) (9,940,732) 27,844,950 58,325,774 20,600,307 22,415,275 (*) Non-performing loans and allowance for impairment are not included. 57

62 4. Financial risk management (continued) 4.3 Liquidity risk (continued) Residual contractual maturities of the financial liabilities 2014 Carrying amount Gross nominal (inflow) / outflow Demand Less than one month 1-3 months 3 months to 1 year 1-5 years More than 5 years Non-derivative liabilities Deposits 131,836, ,381,481 30,053,445 70,379,743 23,698,966 6,770,225 1,477,444 1,658 Obligations under repurchase agreements 20,011,731 20,093, ,603, , ,451 1,143, Funds borrowed 36,617,271 39,583, ,313,761 3,213,578 13,621,382 13,395,093 8,039,525 Debt securities issued 19,731,592 23,591, ,756,445 2,625,626 5,045,318 7,841,500 6,322,555 Payables to stock exchange money market 2,291,363 2,302, ,102, , Trade payables 2,374,759 2,377, , , , ,079 5, Subordinated liabilities 3,384,849 3,547, ,107 1,021,394 2,384,719 Total 216,248, ,876,396 30,930,501 94,717,663 30,574,637 26,021,562 24,883,576 16,748,457 Derivative liabilities Inflow (1,165,413) (50,955,886) -- (19,552,449) (5,955,926) (7,269,178) (13,846,632) (4,331,701) Outflow 749,841 46,788, ,541,831 5,443,808 6,791,669 13,675,887 4,334,995 Total (415,572) (4,167,696) -- (3,010,618) (512,118) (477,509) (170,745) 3,294 58

63 4. Financial risk management (continued) 4.3 Liquidity risk (continued) Residual contractual maturities of the financial liabilities (continued) 2013 Carrying amount Gross nominal (inflow) / outflow Demand Less than one month 1-3 months 3 months to 1 year 1-5 years More than 5 years Non-derivative liabilities Deposits 120,001, ,542,103 26,090,009 65,451,946 19,771,432 8,618, ,059 23,266 Obligations under repurchase agreements 22,595,899 22,689, ,220,910 99, , , ,774 Funds borrowed 29,517,506 31,436, ,470 2,210,801 11,524,678 10,715,751 6,173,319 Debt securities issued 11,120,911 13,964, ,007,327 1,383,400 2,998,876 5,050,897 3,523,889 Payables to stock exchange money market 2,403,976 2,409, ,157, , Trade payables 2,474,550 2,476, , , , ,342 4, Subordinated liabilities 3,090,902 3,360, , ,509 2,492,750 Total 191,205, ,878,973 26,765,976 91,156,939 24,695,327 23,878,834 17,721,899 12,659,998 Derivative liabilities Inflow (1,288,834) (48,972,232) -- (16,946,511) (7,104,651) (9,205,924) (12,617,725) (3,097,421) Outflow 1,201,500 48,347, ,893,774 6,844,044 9,068,480 12,443,643 3,097,398 Total (87,334) (624,893) -- (52,737) (260,607) (137,444) (174,082) (23) The above table shows the undiscounted cash flows of the Group s financial liabilities on the basis of their earliest possible contractual maturity. The Group s expected cash flows on these instruments may vary significantly from this analysis. 59

64 4. Financial risk management (continued) 4.3 Liquidity risk (continued) Residual maturities of non-cash loans Demand Less than one month 1-3 months 3-12 months 1-5 years Over 5 years Total 2014 Letters of credit 3,249, , ,005 3,188,885 79, ,763,406 Letters of guarantee 20,403, ,803 1,641,198 6,208,416 4,745,906 1,171,704 34,649,566 Acceptance 37, , , ,740 23, ,229,731 Other 7,934 87, ,921 82,840 36, ,667 1,020,610 Total 23,698,509 1,081,382 3,216,826 9,918,881 4,885,344 1,862,371 44,663, Letters of credit 3,049, , ,079 2,344, , ,324 6,903,157 Letters of guarantee 17,598, ,831 1,653,869 5,632,291 4,233, ,618 30,615,250 Acceptance 26, , , ,702 29, ,494,946 Other 9,235 62,808 64,494 77,049 50, , ,699 Total 20,683,380 1,356,059 2,682,378 9,018,792 4,462,773 1,566,670 39,770,052 60

65 4. Financial risk management (continued) 4.4 Market risk Market risk is the risk that changes in market prices, such as interest rate, equity prices, foreign exchange rates and credit spreads will affect the Group s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return on risk. Management of market risk The Group separates its exposure to market risk between trading and non-trading portfolios. Trading portfolios mainly are held by the Treasury Department, and include positions arising from market making and proprietary position taking, together with financial assets and liabilities that are managed on a fair value basis. Exposure to market risk trading portfolios The market risk arising from the trading portfolio is monitored, measured and reported using Standard Approach according to the legal legislation. The monthly market risk report and the weekly currency risk reports prepared using Standard Approach are reported to the top management and BRSA. Value at Risk ( VaR ) is also used to measure and control market risk exposure within the Bank s trading portfolios. The VaR of a trading portfolio is the estimated loss that will arise on the portfolio over a specified period of time (holding period) from an adverse market movement with a specified probability (confidence level). The VaR model used is based on historical simulation and Monte Carlo simulation. Average, highest and lowest values of consolidated market risks for the years ended 31 December 2014 and 2013, calculated as per the statutory consolidated financial statements prepared for BRSA reporting purposes within the scope of Regulation on Measurement and Assessment of Capital Adequacy Ratios of Banks are as follows: (*) Average Highest (**) Lowest (**) Average Highest (**) Lowest (**) Interest rate risk 77,490 83,508 76,256 67,836 84,836 70,014 Equity shares risk 81,263 99,104 70,765 82,921 66,840 79,167 Currency risk 325, , , , , ,770 Commodity risk 27,013 39,306 22,933 27,783 53,139 24,797 Settlement risk Option risk 4,441 7,363 2,961 4, ,777 Counterparty credit risk 71,062 63, ,691 56,583 87,866 44,351 Total value at risk 7,345,950 9,150,100 5,935,663 5,216,750 6,726,463 4,477,963 (*) The balances are calculated for three-month periods. (**) Market risk elements are presented for the monthly periods where total value at risk is minimum and maximum. 61

66 4. Financial risk management (continued) 4.4 Market risk (continued) Exposure to interest rate risk non-trading portfolios The principal risk to which non-trading portfolios are exposed is the risk of loss from fluctuations in the future cash flows or fair values of financial instrument because of a change in market interest rates. Interest rate risk is managed principally through monitoring interest rate gaps and by having pre-approved limits for repricing bands. The ALCO is the monitoring body for compliance with these limits and is assisted by Risk Management in its day-to-day monitoring activities. A summary of the Group s interest rate gap position on non-trading portfolios is as follows: 2014 Less than one month 1-3 months 3-12 months 1-5 years Over 5 years 62 Non-interest bearing Carrying amount Cash and cash equivalents ,531,902 2,531,902 Balances with central bank 3,138, ,419,064 22,557,364 Loans and advances to banks 4,838, , , ,910 6,504,828 Loans and advances to customers (*) 26,814,467 32,933,530 39,697,673 56,939,891 13,982, , ,513,406 Trade receivables 113,085 1,156,797 39,615 7, ,308 2,001,207 Insurance receivables 94,600 25,254 65, ,445,330 1,630,744 Available for sale investment securities 6,111,673 7,117,682 10,085,567 10,830,438 11,279, ,305 45,676,771 Held to maturity investment securities 55, , ,622 12, ,391,860 Other assets 310,089 9, , ,692,314 3,029,086 Total assets 41,476,577 42,275,841 51,015,453 67,807,213 25,261,114 28,000, ,837,168 Deposits 70,211,819 23,479,030 6,648,878 1,446,973 1,346 30,048, ,836,478 Obligations under repurchase agreements 18,887, , , , ,011,731 Funds borrowed 6,571,531 16,521,794 8,722, ,676 3,971, ,617,271 Debt securities issued 1,755,571 2,727,070 4,237,006 6,388,918 4,623, ,731,592 Payables to stock exchange money market 2,093, , ,291,363 Trade payables 524, ,732 2,960 6, ,175,266 2,374,759 Taxes and dues payable 22,118 7,989 1, , ,011 Corporate tax liability 1,197 34, , ,183 Insurance contract liabilities ,894,351 5,894,351 Subordinated liabilities ,249 67,342 3,172, ,384,849 Other liabilities 565, ,250 1,001, ,993 35,990 5,792,979 7,956,823 Total liabilities 100,634,617 44,424,754 21,429,180 8,963,077 11,804,067 43,707, ,963,411 Net (59,158,040) (2,148,913) 29,586,273 58,844,136 13,457,047 (15,706,746) 24,873,757 (*) Non-performing loans and allowance for impairment are not included.

67 4. Financial risk management (continued) 4.4 Market risk (continued) Exposure to interest rate risk non-trading portfolios (continued) 2013 Less than one month 1-3 months 3-12 months 1-5 years Over 5 years Non-interest bearing Carrying amount Cash and cash equivalents ,194,664 2,194,664 Balances with central bank ,152,651 21,152,651 Loans and advances to banks 3,917, , , ,501 5,572,863 Loans and advances to customers (*) 30,558,327 24,757,879 32,706,232 45,758,023 13,105,769 12, ,898,840 Trade receivables 802,815 1,177,188 34,189 22, ,788 2,125,711 Insurance receivables 73,674 25,115 90, ,321,021 1,510,112 Available for sale investment securities 8,377,293 4,879,491 7,136,556 6,622,053 6,944, ,546 34,297,792 Held to maturity investment securities 165, ,599 6,628, ,728,447 Other assets 702,237 69,199 9,821 2, ,633,466 3,417,260 Total assets 44,597,378 32,448,681 46,913,068 52,405,344 20,050,622 28,483, ,898,340 Deposits 65,287,255 19,615,819 8,471, ,971 18,295 26,066, ,001,979 Obligations under repurchase agreements 21,469, , , ,595,899 Funds borrowed 8,274,151 11,450,239 5,691,875 1,040,433 3,051,327 9,481 29,517,506 Debt securities issued 1,029,131 1,359,317 2,615,105 3,975,067 2,142, ,120,911 Payables to stock exchange money market 2,398,975 5, ,403,976 Trade payables 625, ,340 3,265 41,363 1,649 1,150,917 2,474,550 Taxes and dues payable , ,425 Corporate tax liability , ,640 Insurance contract liabilities ,299,483 5,299,483 Subordinated liabilities , ,957, ,090,902 Other liabilities 479, ,931 2,435, , ,328,061 8,363,308 Total liabilities 99,563,393 34,501,225 20,041,984 5,736,329 8,171,062 37,382, ,396,579 Net (54,966,015) (2,052,544) 26,871,084 46,669,015 11,879,560 (8,899,339) 19,501,761 (*) Non-performing loans and allowance for impairment are not included. 63

68 4. Financial risk management (continued) 4.4 Market risk (continued) Interest rate risk The following table indicates the average effective interest rates applied to monetary financial instruments by major currencies for the year ended 31 December 2014 and 2013: 2014 USD % EURO % Loans and advances to banks Loans and advances to customers Loans Finance lease receivables Factoring receivables Investment securities Trading Available for sale Held to maturity Deposits Deposits from banks Deposits from customers Obligations under repurchase agreements Debt securities issued Funds borrowed TL % 2013 USD % EURO % TL % Loans and advances to banks Loans and advances to customers Loans Finance lease receivables Factoring receivables Investment securities Trading Available for sale Held to maturity Deposits Deposits from banks Deposits from customers Obligations under repurchase agreements Debt securities issued Funds borrowed Interest rate sensitivity Interest rate sensitivity of profit or loss is the effect of the assumed changes in interest rates on the fair values of financial assets at fair value through profit or loss held as at 31 December 2014 and effect on net interest income of floating rate non-trading financial assets and financial liabilities held at 31 December Interest rate sensitivity of the other comprehensive income is calculated by considering the effects of the assumed changes in interest rates on the fair values of fixed rate available-for-sale financial assets as at 31 December

69 4. Financial risk management (continued) 4.4 Market risk (continued) Interest rate sensitivity (continued) As of 31 December 2014 and 2013, the analysis assumes that all other variables, in particular foreign currency rates, remain constant. 100 bp 100 bp 100 bp increase decrease increase 100 bp decrease Profit or loss (193,676) 258,010 (160,124) 177,438 Equity (909,325) 999,981 (622,653) 673,953 Currency risk The Group is exposed to currency risk through transactions in foreign currencies and through its investment in foreign operations. Management of currency risk Risk policy of the Group is based on keeping the transactions within defined limits and keeping the currency position well-balanced. The Group has established a foreign currency risk management policy that enables the Group to take a position between lower and upper limits which are determined, taking total equity of the Group into account (*) US Dollar Euro 65 Other currencies Cash and cash equivalents 566, ,858 50, ,045 Balances with central bank 11,674,873 3,792,701 3,951,263 19,418,837 Loans and advances to banks 1,034,032 1,144, ,037 2,645,646 Financial assets at fair value through profit or loss 451, , ,311 Loans and advances to customers 48,562,285 22,066,702 1,865,710 72,494,697 Trade receivables 230, ,592 19, ,586 Insurance receivables 198,862 57,125 97, ,276 Available for sale investment securities 7,496, ,217 18,711 8,215,661 Held to maturity investment securities 25,726 19,023 6,258 51,007 Other assets 477, ,189 92, ,130 Total foreign currency denominated monetary assets 70,718,164 28,588,472 6,569, ,876,196 Deposits 30,403,784 23,560,866 5,955,543 59,920,193 Obligations under repurchase agreements 2,981, ,225 28,986 3,200,295 Funds borrowed 18,299,609 11,448,316 5,103 29,753,028 Debt securities issued 13,539,609 18,017 27,698 13,585,324 Trade payables 326,132 91,329 6, ,374 Insurance contract liabilities 443, , , ,987 Subordinated liabilities 3,384, ,384,849 Other liabilities 1,379, ,945 54,522 2,089,656 Total foreign currency denominated monetary liabilities 70,758,252 36,154,232 6,199, ,111,706 Net statement of financial position (40,088) (7,565,760) 370,338 (7,235,510) Net off balance sheet position 1,328,346 4,202,312 (1,505,784) 4,024,874 Net long/(short) position 1,288,258 (3,363,448) (1,135,446) (3,210,636) (*) Assets and liabilities of foreign subsidiaries denominated in their own functional currencies are not included in the table above. Total

70 4. Financial risk management (continued) 4.4 Market risk (continued) Management of currency risk (continued) 2013 (*) US Dollar Euro Other currencies Total Cash and cash equivalents 545, ,535 64, ,973 Balances with central bank 7,365,359 6,752,067 3,108,242 17,225,668 Loans and advances to banks 2,801,923 1,677, ,713 4,910,177 Financial assets at fair value through profit or loss 349, , ,920 Loans and advances to customers 40,221,882 21,863,114 1,493,583 63,578,579 Trade receivables 193, ,256 26, ,643 Insurance receivables 21,228 20,896 88, ,885 Available for sale investment securities 6,431, ,453 33,243 7,241,218 Held to maturity investment securities 2,115 7,561 6,021 15,697 Other assets 873, ,814 83,583 1,642,961 Total foreign currency denominated monetary assets 58,806,510 32,291,828 5,335,383 96,433,721 Deposits 23,353,073 25,917,114 5,770,351 55,040,538 Obligations under repurchase agreements 3,932, ,748 16,117 4,176,477 Funds borrowed 13,899,714 10,793,993 1,754 24,695,461 Debt securities issued 6,007, ,007,543 Trade payables 54,717 48,740 20, ,437 Insurance contract liabilities 580, , , ,560 Subordinated liabilities 3,090, ,090,902 Other liabilities 2,099,656 1,340,153 41,698 3,481,507 Total foreign currency denominated monetary liabilities 53,018,428 38,549,558 5,956,439 97,524,425 Net statement of financial position 5,788,082 (6,257,730) (621,056) (1,090,704) Net off balance sheet position (5,174,532) 3,479, ,310 (1,344,568) Net long/(short) position 613,550 (2,778,076) (270,746) (2,435,272) (*) Assets and liabilities of foreign subsidiaries denominated in their own functional currencies are not included in the table above. For the purposes of the evaluation of the table above, the figures represent the TL equivalent of the related foreign currencies. 66

71 4. Financial risk management (continued) 4.4 Market risk (continued) Exposure to currency risk 10 percent devaluation of the TL against the following currencies as at and for the years ended 31 December 2014 and 2013 would affect consolidated profit or loss and equity (without tax effects) by the amounts shown below. Profit or loss Equity (*) Profit or loss Equity (*) US Dollar 253, ,555 59,367 54,019 Euro (360,905) (355,102) 336, ,598 Other currencies 39,722 39,583 (1,983) (2,108) Total, net (67,709) (32,964) 393, ,509 (*) Includes profit/loss effect. 10 percent revaluation of the TL against the following currencies as at and for the year ended 31 December 2014 and 2013 would affect consolidated profit or loss and equity (without tax effects) by the amounts shown below. Profit or loss Equity (*) Profit or loss Equity (*) US Dollar (253,474) (282,555) (59,367) (54,019) Euro 360, ,102 (336,588) (343,598) Other currencies (39,722) (39,583) 1,983 2,108 Total, net 67,709 32,964 (393,972) (395,509) (*) Includes profit/loss effect. This analysis assumes that all other variables, in particular interest rates, remain constant. Equity price risk Equity price risk is the risk that the fair values of equities decrease as the result of the changes in the levels of equity indices and the value of individual stocks. The Group is exposed to the equity share risk arising from its investments in companies, which are traded on the stock exchange. Equity shares are generally acquired for trading investment purposes. Equity shares portfolio is immaterial and therefore the Group s sensitivity to the share price risks is limited. Unless the equity share investments classified as assets available for sale are disposed of or impaired, the net profit/loss will not be affected. 67

72 4. Financial risk management (continued) 4.4 Market risk (continued) Fair value information The estimated fair values of financial instruments have been determined using available market information by the Group, and where it exists, appropriate valuation methodologies. However, judgment is necessary to interpret market data to determine the estimated fair value. While management has used available market information in estimating the fair values of financial instruments, the market information may not be fully reflective of the value that could be realized in the current circumstances. Management has estimated that the fair value of certain financial assets and liabilities recorded at amortised cost are not materially different than their recorded values except for those of loans and advances to customers and investment securities. These financial assets and liabilities include loans and advances to banks, obligations under repurchase agreements, funds borrowed, and other short-term assets and liabilities that are of a contractual nature. Management believes that the carrying amount of these particular financial assets and liabilities approximates their fair values, partially due to the fact that it is practice to renegotiate interest rates to reflect current market conditions. Carrying amount Fair value Cash and cash equivalents 2,531,902 2,194,664 2,531,902 2,194,664 Balances with central bank 22,557,364 21,152,651 22,557,364 21,152,651 Loans and advances to banks 6,504,828 5,572,863 6,526,848 5,592,245 Trading investment securities 1,185,942 1,624,680 1,185,942 1,624,680 Derivative financial instruments 1,165,413 1,288,834 1,165,413 1,288,834 Loans and advances to customers 170,346, ,863, ,477, ,828,228 Available for sale investment securities 45,676,771 34,297,792 45,676,771 34,297,792 Held to maturity investment securities 1,391,860 7,728,447 1,396,454 7,833,550 Total financial assets 251,360, ,723, ,518, ,812,644 Deposits 131,836, ,001, ,887, ,997,531 Obligations under repurchase agreements 20,011,731 22,595,899 20,011,731 22,595,889 Derivative financial instruments 749,841 1,201, ,841 1,201,500 Debt securities issued 19,731,592 11,120,911 19,942,861 11,031,127 Funds borrowed 36,617,271 29,517,506 36,547,197 30,084,539 Payables to stock exchange money market 2,291,363 2,403,976 2,291,363 2,403,976 Subordinated liabilities 3,384,849 3,090,902 3,532,788 2,935,212 Total financial liabilities 214,623, ,932, ,963, ,249,774 68

73 4. Financial risk management (continued) 4.4 Market risk (continued) Classification of fair value measurement The Group measures fair values using the following fair value hierarchy, which reflects the significance of the inputs used in making the measurements. Level 1: inputs that are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices). Level 3: inputs for the assets or liability that are not based on observable market data (unobservable inputs). The classification of fair value measurements of financial assets and liabilities measured at fair value is as follows: 2014 Level 1 Level 2 Level 3 Total Financial assets at fair value through profit and loss Debt securities 788,396 15,246 1, ,714 Equity shares 69, ,843 Other 13, , ,385 Derivative financial assets -- 1,165, ,165,413 Financial asset available for sale Debt securities 36,865,298 7,627, ,601 45,237,105 Equity shares (*) 37, ,780 Other , ,701 Derivative financial liabilities , ,841 (*) As at 31 December 2014, securities that are not publicly traded and the determination of fair values could not be obtained reliably amounting to TL 63,951 have been measured at cost Level 1 Level 2 Level 3 Total Financial assets at fair value through profit and loss Debt securities 1,361,402 5,901 57,228 1,424,531 Equity shares 29, ,222 Other 170, ,927 Derivative financial assets -- 1,288, ,288,834 Financial asset available for sale Debt securities 24,694,964 5,191,314 4,088,062 33,974,340 Equity shares (*) 22, ,512 Other 6, , ,047 Derivative financial liabilities -- 1,201, ,201,500 (*) As at 31 December 2013, securities that are not publicly traded and the determination of fair values could not be obtained reliably amounting to TL 75,893 have been measured at cost. There has not been any transition between Level 1 and Level 2 during 2014 and

74 4. Financial risk management (continued) 4.4 Market risk (continued) The reconciliation from the beginning balances to the ending balances for fair value measurements in Level 3 of the fair value hierarchy as at and for the year ended 31 December 2014 and 2013 is as follows: 70 Balance at the beginning of the year 4,145,290 1,227,911 Purchases 53,576 2,995,775 Redemption or sales (506,758) (297,139) Valuation difference 33, ,532 Transfer (2,979,772) 47,211 Balance at the end of the year 745,673 4,145,290 Level 3 of the fair value hierarchy includes all instruments where the valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the instrument s valuation. This category includes instruments that are valued based on quoted prices for similar instruments where significant unobservable adjustments or assumptions are required to reflect differences between the instruments. During 2014, certain investment securities were transferred out of Level 3 of the fair value hierarchy amounting to TL 2,979,772 when significant inputs used in their fair value measurements such as certain credit spreads and long-dated option volatilities, which were previously unobservable, became observable. During 2013, due to changes in market conditions for certain investment securities, quoted prices in active markets were no longer available for these securities. Hence, these securities amounting to TL 47,211 were transferred into Level 3 of the fair value hierarchy. 4.5 Operational risk Operational risk is the risk of direct or indirect loss arising from a wide variety of causes associated with the Bank s processes, personnel, technology and infrastructure, and from external factors other than credit, market and liquidity risks, such as those arising from legal and regulatory requirements and generally accepted standards of corporate behavior. Operational risks arise from all of the Bank s operations and are faced by all business entities. The operational risk items in the Bank are determined in accordance with the definition of operational risk by considering as a whole processes, products and departments. The control areas are set for operational risks within the Bank and all operational risks are followed by assigning the risks to these control areas. In this framework, an appropriate monitoring methodology is developed for each control area that covers all operational risks and control frequencies are determined. Qualitative and quantitative methods are used in the measurement and evaluation of operational risk. In this process, information is obtained from "Impact-Probability Analysis", "Missing Event Data Analysis", "Risk Indicators" methods. At minimum, methods prescribed by legal regulations are applied in determining the capital requirement level for the operating risk. All the operational risks that are exposed during the operations, the risk levels of the operations and/or new products/services, together with the losses of the Bank arising from operational risks are regularly monitored by the Risk Management Department of the Bank, and if deemed necessary, the risk levels are updated and periodically reported to the Risk Committee and the Board of Directors. The operational risk capital requirement is calculated according to Regulation on Measurement and Evaluation of Capital Adequacy of Banks article number 24, using the Basic Indicator Approach once a year in parallel with domestic regulations. The amount, calculated as TL 1,252,503 as at 31 December 2014 (31 December 2013: TL 1,090,380) represents the operational risk that the Group may be exposed to and the amount of minimum capital requirement to eliminate this risk. Value of operational risk amounted to TL 15,656,293 (31 December 2013: TL 13,629,748) and is calculated as 12.5 times the operational risk.

75 4. Financial risk management (continued) 4.6 Capital management regulatory capital BRSA, the regulatory body of the banking industry sets and monitors capital requirements for the Bank. In implementing current capital requirements, BRSA requires the banks to maintain a prescribed ratio of a minimum of 8% of total capital to total risk-weighted assets. BRSA regulation requires the calculation of the capital adequacy ratio based on the consolidated financial statements of the Bank and its financial subsidiaries. The Group s regulatory capital consists of the sum of the following elements: Tier 1 capital, which includes share capital, share premium, legal reserves, retained earnings, other comprehensive income, translation reserve and non-controlling interests after deductions for goodwill and certain cost items. Tier 2 capital, which includes qualifying subordinated liabilities and certain provisions for loan losses that are presently unidentified on an individual basis. Banking operations are categorised as either trading book or banking book, and risk-weighted assets are determined according to specified requirements that seek to reflect the varying levels of risk attached to assets and off-balance sheet exposures. As at 31 December 2014 and 2013 operational risk capital requirements are calculated using the Basic Indicator Approach and market risk capital requirements are calculated using Standard Method and included in the capital adequacy calculations. The Bank s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. The Bank and its individually regulated operations have complied with externally imposed capital requirements throughout the year and the previous year. The Bank s and its financial subsidiaries regulatory capital position on a consolidated basis as at 31 December 2014 and 2013 was as follows: 2014 (*) 2013 (**) Tier 1 capital 31,535,610 25,607,957 Tier 2 capital 6,023,843 5,133,727 Deductions from capital (62,146) (174,324) Total regulatory capital 37,497,307 30,567,360 Risk-weighted assets 220,180, ,037,450 Value at market risk 9,150,100 6,726,250 Operational risk 15,656,293 13,629,748 Capital ratios Total regulatory capital expressed as a percentage of total riskweighted assets, value at market risk and operational risk Total Tier 1 capital expressed as a percentage of total riskweighted assets, value at market risk and operational risk (*) Current period capital ratios are calculated within the scope of the Regulation on Measurement and Evaluation of Capital Adequacy of Banks published in the Official Gazette No dated 5 September 2013 and applied after 1 January (**) Prior period capital ratios are calculated in accordance with the Regulation on Measurement and Assessment of Capital Adequacy Ratios of Banks published in Official Gazette No dated 28 June 2012 which is complaint to Basel II. 71

76 5. Management of insurance risk Insurance risk is defined as coverage for exposures that exhibit a possibility of financial loss due to applying inappropriate and insufficient insurance techniques. Main reasons of insurance risk exposure result from the risk selection and inaccurate calculation of insurance coverage, policy terms and fee or inaccurate calculation of coverage portion kept within the company and coverage portion transfers to policyholders and transfer conditions. Objective of managing risks arising from insurance contracts and policies used to minimize such risks Potential risks that may be exposed in transactions are managed based on the requirements set out in the Group s Risk Management Policies issued by the approval of the Board of Directors. The main objective of risk management policies is to determine the risk measurement, assessment, and control procedures and maintain consistency between the Group s asset quality and limitations allowed by the insurance standards together with the Group s risk tolerance of the accepted risk level assumed in return for a specific consideration. In this respect, instruments that are related to risk transfer, such as; insurance risk selection, risk quality follow-up by providing accurate and complete information, effective monitoring of level of claims by using risk portfolio claim frequency, treaties, facultative reinsurance contracts and coinsurance agreements, and risk management instruments, such as; risk limitations, are used in achieving the related objective. Risk tolerance is determined by the Group s Board of Directors by considering the Group s long-term strategies, equity resources, potential returns and economical expectations, and it is presented by risk limitations. Authorization limitations during policy issuing include authorizations for risk acceptances granted based on geographical regions in relation to unacceptable special risks or pre-approved acceptable special risks, insurance coverage to agencies, district offices, technical offices, assistant general managers and top management in the policy issuance period and authorizations for claim payment granted to district offices, claim management administration, automobile claims administration and Claim Committee established by the managing director and assistant managing director in the claim payment period. Whatsoever, risk acceptance is based on technical income expectations under the precautionary principle. In determining insurance coverage, policy terms and fee, these expectations are based accordingly. It is essential that all the authorized personnel in charge of executing policy issuance transactions, which is the initial phase of insurance process, should ensure to gather or provide all the accurate and complete information to issue policies in order to obtain evidence on the acceptable risks that the Group can tolerate from the related insurance transactions. On the other hand, decision to be made on risk acceptance will be possible by transferring the coverage to the reinsurers and/or coinsurers and considering the terms of the insurance policy. In order to avoid destructive losses over company s financial structure, company transfers the exceeding portion of risks assumed over the Group s risk tolerance and equity resources through treaties, facultative reinsurance contracts and coinsurance agreements to reinsurance and coinsurance companies. Insurance coverage and policy terms of reinsurance are determined by assessing the nature of each insurance branch. 72

77 5. Management of insurance risk (continued) Objective of managing risks arising from reinsurance contracts and policies used to minimize such risks (continued) Reinsurance risk is defined as a possibility of financial loss due to inappropriate and insufficient application of reinsurance techniques in the activities of taking insurance contract responsibility partially or completely. Potential risks that may be exposed in transactions are described, classified and managed based on the requirements set out in the Group s Regulative Framework on the Risk Management Activities, Risk Management Policies and Implementation Procedures and Principles of the Risk Management issued by the approval of the Board of Directors. The main objective of the Regulative Framework on the Risk Management Activities, Risk Management Policies and Implementation Procedures and Principles of the Risk Management is to determine the risk measurement, assessment, and control procedures and maintain consistency between the Group s asset quality and limitations allowed by the insurance standards together with the Group s risk tolerance of the accepted risk level assumed in return for a specific consideration. In this respect, instruments that are related to risk transfer, such as; insurance risk selection, risk quality follow-up by providing accurate and complete information, effective monitoring of level of claims by using risk portfolio claim frequency, treaties, facultative reinsurance contracts and coinsurance agreements, and risk management instruments, such as; risk limitations, are used in achieving the related objective. Reinsurance risk is measured by quantitative methods and kept under pre-specified limits based on the Limit over Acceptable Reinsurance Risk and Maximum Custody Share Limit updated and approved annually by the Board of Directors. Reinsurance risk is monitored regularly according to criteria described in the Limit over Acceptable Reinsurance Risk and Maximum Custody Share Limit policy and results are analysed by the Risk Committee and reported to the Board of Directors. Action plan is determined by the Board of Directors in the case of having exposure higher than acceptable level of risk and probability. Sensitivity to insurance and reinsurance risk Insurance risks do not generally have significant unrecoverable losses in the course of ordinary transactions, except for risks associated with earthquake and other catastrophic risks. Therefore, there is a high sensitivity to earthquake and catastrophic risks. The case of potential claims arising from earthquake and other catastrophic risks exceeding the maximum limit of the excess of loss agreements, such risks are treated as the primary insurance risks and are managed based on the precautionary principle. Maximum limit of excess of loss agreements is determined based on the worst case scenario on the possibility of an earthquake that Istanbul might be exposed to in terms of its severity and any potential losses incurred in accordance with the generally accepted international earthquake models. 73

78 5. Management of insurance risk (continued) Insurance risk concentrations The Group s gross and net insurance risk concentrations (after reinsurance) in terms of insurance branches are summarized as below: Branches (*) Gross total claims liability 2014 Reinsurance share of total claims liability Net total claims liability Life insurance 1,844,737 (3,221) 1,841,516 Motor vehicles liability (MTPL) 536,684 (16,322) 520,362 General liability 302,883 (35,817) 267,066 Motor vehicles 83,782 1,275 85,057 Health 75,389 (2,590) 72,799 Fire and natural disasters 126,899 (67,749) 59,150 General losses 68,615 (41,639) 26,976 Water vehicles 35,734 (18,674) 17,060 Accident 15,097 (1,292) 13,805 Air crafts liability 28,944 (20,173) 8,771 Transportation 19,805 (13,707) 6,098 Air crafts 4,955 (60) 4,895 Financial losses 17,018 (15,402) 1,616 Legal protection Credit 759 (187) 572 Total 3,162,177 (235,558) 2,926,619 (*) Total claims liability includes outstanding claims reserve, life mathematical provisions and incurred but not reported claims. Branches (*) Gross total claims liability 2013 Reinsurance share of total claims liability Net total claims liability Life insurance 1,875,474 (3,998) 1,871,476 Motor vehicles liability (MTPL) 392,957 (15,116) 377,841 General liability 145,694 (14,833) 130,861 Health 102,625 (18,949) 83,676 Fire and natural disasters 75,030 (31,394) 43,636 Motor vehicles 57,404 1,790 59,194 General losses 55,320 (33,483) 21,837 Water vehicles 22,200 (8,976) 13,224 Transportation 22,054 (11,185) 10,869 Accident 16,393 (431) 15,962 Air crafts liability 7,323 (5,560) 1,763 Financial losses 1,482 (313) 1,169 Credit 1,353 (18) 1,335 Air crafts 1, ,262 Legal protection 449 (57) 392 Total 2,776,986 (142,489) 2,634,497 (*) Total claims liability includes outstanding claims reserve, life mathematical provisions and incurred but not reported claims. 74

79 5. Management of insurance risk (continued) Re-insurance risk concentrations The Group s gross and net re-insurance risk concentrations (after reinsurance) in terms of insurance branches are summarized as below: Branches (*) Gross total claims liability 2014 Reinsurance share of total claims liability Net total claims liability Fire and natural disasters 239,503 (4,234) 235,269 General losses 151,373 (1,906) 149,467 General responsibility 142,302 (1,955) 140,347 Motor vehicles liability (MTPL) 136, ,783 Water vehicles 31,778 (4,685) 27,093 Transportation 20,772 (1,188) 19,584 Accident 15,671 (12) 15,659 Life insurance 8,265 (2,226) 6,039 Motor vehicles 6,997 (104) 6,893 Breach of trust 1,654 (43) 1,611 Health Credit Air crafts Financial losses Water vehicles liability Legal protection Total 756,900 (16,270) 740,630 (*) Total claims liability includes outstanding claims reserve, life mathematical provisions and incurred but not reported claims. Branches (*) Gross total claims liability 2013 Reinsurance share of total claims liability Net total claims liability Fire and natural disasters 255, ,795 General losses 167,324 (3,099) 164,225 Motor vehicles liability (MTPL) 103,794 (62) 103,732 General responsibility 78,088 (1,792) 76,296 Water vehicles 31,161 (3,572) 27,589 Transportation 21,702 (2,771) 18,931 Accident 12,027 (169) 11,858 Motor vehicles 10,931 (20) 10,911 Life insurance 7,428 (2,060) 5,368 Breach of trust 1,514 (70) 1,444 Health 1, ,287 Financial losses Air crafts Water vehicles liability Legal protection 38 (1) 37 Credit Total 692,031 (12,683) 679,348 (*) Total claims liability includes outstanding claims reserve, life mathematical provisions and incurred but not reported claims. 75

80 6. Business combinations There is no business combination within the scope of IFRS-3 Business Combinations between 1 January and 31 December Business combinations in the year 2013 The Group acquired 100% of shares of Fritz Holding GmbH., for a purchase consideration of EURO 3,000,000 on 31 May The Group aimed to gain a large share of market in Germany and supporting its target of production and sale of glass encapsulation. Identifiable assets acquired and liabilities assumed Net Book Value Fair Value Current Assets 85,144 81,772 Cash and cash equivalents 17,036 17,036 Trade receivables 28,227 28,339 Inventories 28,849 24,278 Prepaid expenses Other current assets 10,295 4,455 Assets held for sale -- 6,927 Non-current assets 66,010 69,880 Tangible assets 65,201 48,593 Other non-current assets ,287 Total Assets 151, ,652 Liabilities Current liabilities 89, ,508 Financial liabilities Trade payables 23,531 22,769 Other payables 62,340 62,340 Short-term provision -- 35,237 Other current liabilities 3,493 14,822 Non-current liabilities 29,441 12,403 Financial liabilities 6,745 6,927 Other payables 22, Long-term provisions 679 1,454 Deferred tax liabilities -- 4,022 Total liabilities 119, ,911 Total net identifiable assets 32,009 3,741 The cash paid -- 7,262 Cash and cash equivalents acquired -- (17,036) Net cash outflow -- (9,774) Goodwill (Note 17) -- 3,522 Currency translation differences Goodwill as at 31 December ,272 In the consolidated statements of income, the share of Fritz Holding GmbH in the revenue after the acquisition date is TL 256,540. In the same period, its contribution to the profit attributable to equity holders of the parent is TL 14,565. Had Fritz Holding GmbH been included in the consolidation starting from 1 January 2013, additional net revenue of TL 164,545 and a decrease in the consolidated statement of income by TL 144 would have been recognized. 76

81 7. Cash and cash equivalents At 31 December 2014 and 2013, cash and cash equivalents comprised the following: Cash on hand 2,531,681 2,190,365 - Turkish lira 1,624,651 1,339,392 - Foreign currency 907, ,973 Other liquid assets 221 4,299 Total cash and cash equivalents 2,531,902 2,194,664 There is no blockage or restriction on the cash and cash equivalents presented above as at 31 December 2014 and Cash and cash equivalents 2,531,902 2,194,664 Loans and advances to banks (with original maturity of less than 3 months) 5,324,063 4,659,587 Unrestricted balances with the central banks 5,765,495 6,079,492 Money market placements 262, ,360 Cash and cash equivalents in the statement of cash flows 13,884,443 13,074, Balances with central bank Unrestricted balances with central bank Demand deposits Turkish Lira 3,138,527 3,926,983 Demand deposits Foreign currency 2,627,004 2,152,509 5,765,531 6,079,492 Reserve deposits Demand deposits Foreign currency 16,791,833 15,073,159 16,791,833 15,073,159 Total balances with central bank 22,557,364 21,152,651 As per the Communiqué numbered 2013/15 Reserve Deposits of the Central Bank of the Republic of Turkey (CBRT), banks keep reserve deposits at the CBRT for their TL and FC liabilities mentioned in the communiqué. The reserve deposit rates vary according to their maturity compositions; the reserve deposit rates are realized between 5%-11.5% for TL deposits and other liabilities, between 9%-13% for FC deposits and between 6%-13% for other FC liabilities. Reserves are calculated and set aside every two weeks on Fridays for 14-day periods. In accordance with the related communiqué, CBRT pays interest for TL reserves, however do not pay interest for foreign currency reserves. 77

82 9. Loans and advances to banks Domestic banks Demand deposits Turkish Lira 31,243 33,724 Demand deposits Foreign currency 5,489 10,070 Time deposits Turkish Lira 3,150, ,603 Time deposits Foreign currency 1,276,161 3,454,037 4,463,258 3,884,434 Foreign banks Demand deposits Turkish Lira 85, ,984 Demand deposits Foreign currency 985, ,671 Time deposits Turkish Lira 200, Time deposits Foreign currency 506, ,399 1,778,011 1,548,054 Money market placements (*) 263, ,375 Total loans and advances to banks 6,504,828 5,572,863 (*) Money market placements include interest income accrual amounting to TL 576 (31 December 2013: TL 15). For cash flow purposes, the bank balances having original maturity of less than 3 months and not restricted were classified as cash and cash equivalents. These balances amounting to TL 5,324,063 as at 31 December 2014 (31 December 2013: TL 4,659,587). As at 31 December 2014, the balances with banks include TL 340,746 restricted account regarding the covenants of the borrowings and insurance activities (31 December 2013: TL 246,576). 78

83 10. Securities portfolio At 31 December 2014 and 2013, securities portfolio comprised the following: Treasury bills and government bonds 23,639,325 16,116,461 Government bonds (Repurchase agreements) 21,452,271 24,799,810 Debt securities issued by corporations 1,702,894 1,654,279 Mutual funds 574, ,245 Credit linked notes 629, ,137 Equity shares 180, ,904 Debt securities issued by financial institutions 84,668 23,631 Other securities Allowance for impairment on securities (8,643) (13,277) Total of securities portfolio 48,254,573 43,650,919 Financial assets at fair value through profit or loss comprised the following items: Treasury bills and government bonds 171, ,537 Government bonds (Repurchase agreements) 318, ,203 Debt securities issued by corporations 299, ,791 Mutual funds 326, ,198 Equity shares 69,843 29,222 Other securities Total of financial assets at fair value through profit or loss 1,185,942 1,624,680 At 31 December 2014 and 2013, available for sale securities portfolio comprised the following: Treasury bills and government bonds 22,509,358 13,636,804 Government bonds (Repurchase agreements) 20,785,043 18,383,911 Debt securities issued by corporations 1,403,119 1,420,488 Credit linked notes 629, ,137 Mutual funds 247, ,047 Equity shares 110, ,682 Allowance for impairment on securities (8,643) (13,277) Total of available for sale securities 45,676,771 34,297,792 TL 1,736,239 of the available for sale investment comprise marketable securities of Anadolu Hayat, reserved in the name of life insurance policy holders (31 December 2013: TL 1,787,656). 79

84 10. Securities portfolio (continued) The equity shares in available for sale portfolio are unquoted and detailed as follows: İMKB Takas ve Saklama Bankası A.Ş. 43,079 59,025 Kültür Yayınları İş-Türk Ltd. Şti. 5,591 5,591 Kredi Garanti Fonu 4,211 4,211 Bankalararası Kart Merkezi A.Ş. 1,986 1,986 Kredi Kayıt Bürosu A.Ş. 1,685 1,685 T.C. Merkez Bankası 1,452 1,452 Stock Exchange (Borsa İstanbul A.Ş.) 1,589 1,429 Other 50,781 36,303 Allowance for impairment (8,643) (13,277) Total equity shares in available for sale investments 101,731 98,405 The details of allowance for impairment on available for sale portfolio is as follows: Bakırsan Bakır Sanayi Mamülleri Tic. A.Ş. 2,107 2,107 Kültür Yayınları İş-Türk Ltd. Şti. 1,559 1,559 Paşabahçe Mağazaları B.V 1,452 1,452 Other 3,525 8,159 Allowance for impairment on securities 8,643 13,277 Held to maturity investments comprised the following items: Treasury bills and government bonds 958,279 2,212,120 Government bonds (Repurchase agreements) 348,913 5,492,696 Debt securities issued by financial institutions 84,668 23,631 Total of held to maturities portfolio 1,391,860 7,728,447 There is not any reclassification between securities portfolio in the current period. The following table summarizes securities that were deposited as collaterals with respect to various transactions: Guarantee given for repurchase agreements 6,069,559 2,091,076 Guarantee given for Export Finance Intermediary Loan ( EFIL ) 2,019,957 1,375,873 Turkish Treasury 1,820,055 2,160,353 Stock Exchange (Borsa İstanbul A.Ş.) 193, ,466 Central Banks of other countries 191,036 18,048 Central Bank of Turkey 177, ,659 Clearing House 91,786 46,318 Interbank money market 21,074 21,562 Foreign currency market 20,067 20,535 Derivative exchange market 12,002 12,338 Capital Markets Board of Turkey Securities deposited as collaterals 10,617,225 6,939,282 80

85 11. Loans and advances to customers Short term loans Other non-guaranteed loans 20,156,703 18,492,019 Other guaranteed loans 18,300,728 18,009,869 Guaranteed export loans 4,743,236 4,222,591 Loans provided to financial sector 3,653,908 3,442,362 Factoring receivables 1,416, ,550 Finance lease receivables 838, ,133 Loans provided to foreign institutions 514, ,304 Non-guaranteed export loans 498, ,574 Discount and purchase bills 289, ,463 Domestic precious metals loans 149,263 66,156 Indemnified non-cash loans 12,633 9,254 50,573,933 47,844,275 Medium and long term loans Guaranteed other investment and operating loans 85,510,347 71,939,744 Non-guaranteed loans 28,952,829 22,469,951 Finance lease receivables 1,920,390 1,483,274 Loans provided to foreign institutions 1,505,259 1,236,183 Loans provided to financial sector 307,361 78, ,196,186 97,208,003 Interest accruals 1,743,287 1,846,562 Total performing loans and advances to customers 170,513, ,898,840 Non-performing loans and advances to customers Non-performing loans 2,712,288 2,502,942 Non-performing leasing receivables 135, ,585 Non-performing factoring receivables 24,348 16,945 2,872,026 2,629,472 Allowance for impairment Specific allowance for impairment on loans (-) (1,536,539) (1,334,724) Portfolio allowance for impairment on loans (-) (1,398,347) (1,263,299) Allowance for impairment on leasing receivables (-) (80,142) (52,653) Allowance for impairment on factoring receivables (-) (24,348) (14,564) (3,039,376) (2,665,240) Loans and advances to customers, net 170,346, ,863,072 81

86 11. Loans and advances to customers (continued) The movement in the allowance for impairment on loans for the year ended 31 December is as follows: Balance as at 1 January 2,598,023 2,408,990 Provision set during the year 1,013, ,436 Collection and recoveries (255,559) (636,328) Effects of exchange rates in movements (47,702) 55,644 Loans written-off during the year (*) (373,137) (208,719) Balance as at 31 December 2,934,886 2,598,023 (*) In the current period, portion of non-performing loans amounting to TL 272,517 including previously written-off receivables amounting to TL 6,045 has been sold to Girişim Varlık Yönetim A.Ş. for TL 44,017. (31 December 2013: TL 87,849 has been sold to LBT Varlık Yönetim A.Ş. for TL 10,430 and TL 163,865 Girişim Varlık Yönetimi A.Ş. for TL 32,041). As at 31 December 2014 and 2013, details of finance lease receivables are as follows: 2014 Short term Long term Total Invoiced finance lease receivables 32, ,660 Uninvoiced finance lease receivables 1,002,907 2,100,927 3,103,834 Unearned interest income (-) (197,423) (277,731) (475,154) Ongoing leasing contracts (*) -- 44,935 44,935 Advances given for lease transactions -- 52,259 52,259 Total performing finance lease receivables 838,144 1,920,390 2,758,534 Non-performing leasing receivables 104,487 30, ,390 Allowance for impairment on leasing receivables (-) (61,850) (18,292) (80,142) Finance lease receivables, net 880,781 1,933,001 2,813, Short term Long term Total Invoiced finance lease receivables 37, ,335 Uninvoiced finance lease receivables 756,488 1,443,417 2,199,905 Unearned interest income (-) (130,690) (163,309) (293,999) Ongoing leasing contracts (*) , ,526 Advances given for lease transactions -- 45,640 45,640 Total performing finance lease receivables 663,133 1,483,274 2,146,407 Non-performing leasing receivables 107,512 2, ,585 Allowance for impairment on leasing receivables (-) (51,657) (996) (52,653) Finance lease receivables, net 718,988 1,484,351 2,203,339 (*) The Group purchases machinery and equipment from domestic and foreign suppliers on behalf of the lessees on the basis of the leasing contract terms. As at 31 December 2014 and 2013, the balance includes the total amount paid for these machinery and equipment but not charged to the lessees yet. 82

87 11. Loans and advances to customers (continued) The movement in the allowance for impairment on finance lease receivables loans for the year ended 31 December is as follows: (*) Balance as at 1 January 52,653 57,966 Provision set during the year 28,042 14,946 Collection and recoveries (553) (181) Loans written off during the period -- (20,078) Balance as at 31 December 80,142 52,653 (*) Loans written-off consist of the portfolio formed within non-performing finance receivables and sold to Türkasset Varlık Yönetim A.Ş. As at 31 December 2014 and 2013, details of factoring receivables are as follows: Domestic factoring receivables, net 1,191, ,680 Export and import factoring receivables 228, ,425 Interest income accrual on factoring receivables 9,672 3,685 Unearned interest income (12,277) (7,240) Total performing factoring receivables 1,416, ,550 Non-performing factoring receivables 24,348 16,945 Allowance for impairment on factoring receivables (-) (24,348) (14,564) Factoring receivables, net 1,416, ,931 Except for its non-performing receivables for which 100% allowance is provided, the Company has factoring receivables of TL 1,430 that are overdue less than 90 days (31 December 2013: TL 1,649). As at the reporting date, the Company does not have any restructured factoring receivables that would be classified as overdue or non performing otherwise. The movement in the allowance for impairment on factoring receivables loans for the year ended 31 December is as follows: Balance as at 1 January 14,564 10,902 Provision set during the year 11,095 4,006 Collection and recoveries (1,311) (344) Balance as at 31 December 24,348 14,564 83

88 12. Trade receivables As at 31 December 2014 and 2013, trade receivable comprised the following: Trade receivables in manufacturing companies 1,113,732 1,134,506 Customer receivables of brokerage firms 584, ,506 Other trade receivables 302, ,699 Doubtful receivables 54,148 42,753 Total trade receivables 2,055,355 2,168,464 Allowance for doubtful receivables (-) (54,148) (42,753) Trade receivables, net 2,001,207 2,125,711 The movement in the allowance for impairment in respect of trade receivables for the year ended 31 December is as follows: Balance as at 1 January 42,753 40,450 Impairment loss recognized 22,287 12,981 Effects of exchange rates in movements (1,772) 92 Collection during the year (8,727) (4,521) Provision reversed (393) (6,249) Balance as at 31 December 54,148 42,753 Terms for the Group s manufacturing companies domestic sales based on the main product lines are as follows: Average sales term for basic glasses is 90 days (31 December 2013: 90 days) and 2% overdue interest rate is applied for the payments made after the due date (31 December 2013: 1.5%). Average sales term for auto glass and processed glass items is 45 days (31 December 2013: 45 days). A portion of foreign sales are made in cash and the remaining portion receivable has average 45 days (31 December 2013: 60 days) maturity. Average sales term for automatic glass items is 75 days (31 December 2013: 75 days) and a monthly overdue interest rate of 2% is applied for the payments made after the due date (31 December 2013: 3%). Glass packaging products have been sold on cash terms since 1 November According to the customer demand a monthly interest of 1.25% for the payment terms up to 121 days and a monthly interest rate of 3% is applied for the payments exceeding 121 days. Inter-group sales terms of soda products are 30 days. The applied average term of domestic external sales related to soda products is 43 days (31 December 2013: 43 days). Monthly 2% overdue interest is applied for the payments made after due dates (31 December 2013: 2%). Average sales term for domestic sales of chromium products in foreign currency is 29 days (31 December 2013: 25 days). A monthly overdue interest rate of 1% is applied for the payments made after the due date (31 December 2013: 1%). Average sales term for export sales is 63 days (31 December 2013: 60 days). 84

89 12. Trade receivables (continued) Receivables related to heavy engineering industry sales are collected in accordance with progress payment plan. The Group has recognised provision for doubtful receivables. Allowance for doubtful receivables is determined by referring to past default experience. In determining the recoverability of a trade receivable, the Group considers any change in the credit quality of the trade receivable from the date credit was initially granted to the reporting date. The Group has no significant concentration on credit risk, with exposure spread over a large number of counterparties and customers. Accordingly, the management believes that no further credit provision is required in excess of the allowance for doubtful receivables. 13. Inventories As at 31 December 2014 and 2013, inventories comprised the following: Finished goods 877, ,602 Raw materials 360, ,109 Trading goods 131, ,392 Trading properties 67,374 35,530 Work in progress 34,132 46,532 Others 102,472 61,080 Total inventories 1,572,901 1,360,245 Allowance for impairment (-) (21,012) (18,352) Inventories, net 1,551,889 1,341,893 The movement in the allowance for impairment in respect of inventories for the year ended 31 December is as follows: Balance as at 1 January 18,352 19,476 Impairment loss recognized 7,219 1,533 Effects of exchange rates in movements (1,866) 693 Provision released (2,693) (3,350) Balance as at 31 December 21,012 18,352 85

90 14. Insurance receivables and insurance contract liabilities Insurance receivables At 31 December 2014 and 2013, insurance receivables comprised the following: Receivables from agencies, brokers and intermediaries 735, ,722 Receivables from reinsurance and insurance companies 722, ,171 Cash deposited to insurance and reinsurance companies 67,872 85,467 Receivables from policyholders 54,083 65,961 Salvage and subrogation receivables 22,972 19,705 Premium receivables from insurance activities 16,355 12,789 Capital advances given to pension mutual funds 11,108 8,297 Doubtful receivables from insurance operations 132, ,342 Total insurance receivables 1,763,627 1,633,454 Allowance for non-performing insurance receivables (-) (132,883) (123,342) Insurance receivables, net 1,630,744 1,510,112 The details of guarantees for the Group s insurance receivables are presented below: Letters of guarantees 79, ,324 Mortgage notes 75,763 72,663 Other guarantees 19,353 19, , ,662 The movement in the allowance for impairment in respect of insurance receivables for the year ended 31 December is as follows: Balance at 1 January 123, ,631 Impairment loss recognised 9,824 16,080 Collections during the year (1,071) (909) Effects of exchange rates in movements 788 1,540 Balance as at 31 December 132, ,342 86

91 14. Insurance receivables and insurance contract liabilities (continued) Insurance contract liabilities Insurance contract liabilities at 31 December 2014 and 2013 are detailed in the tables below: 2014 Gross Ceded Net Life mathematical provisions 1,847,147 (3,221) 1,843,926 Provision for outstanding claims 2,071,929 (248,608) 1,823,321 Reserve for unearned premiums 1,879,603 (341,142) 1,538,461 Reserve for unexpired risks 95,006 (13,476) 81,530 Provision for bonus and discounts 666 (506) 160 Total insurance contract liabilities 5,894,351 (606,953) 5,287, Gross Ceded Net Life mathematical provisions 1,881,592 (3,998) 1,877,594 Provision for outstanding claims 1,587,427 (151,174) 1,436,253 Reserve for unearned premiums 1,801,597 (333,346) 1,468,251 Reserve for unexpired risks 28,385 (9,371) 19,014 Provision for bonus and discounts 482 (353) 129 Total insurance contract liabilities 5,299,483 (498,242) 4,801,241 The movement of the reserve for unearned premiums for the year ended 31 December is as follows: 2014 Gross Ceded Net Reserve for unearned premiums at the beginning of the year 1,801,597 (333,346) 1,468,251 Premiums written during the year 4,231,525 (828,090) 3,403,435 Premiums earned during the year (Note 35) (4,153,519) 820,294 (3,333,225) Reserve for unearned premiums at the end of the year 1,879,603 (341,142) 1,538, Gross Ceded Net Reserve for unearned premiums at the beginning of the year 1,521,751 (247,051) 1,274,700 Premiums written during the year 4,015,505 (821,755) 3,193,750 Premiums earned during the year (Note 35) (3,735,659) 735,460 (3,000,199) Reserve for unearned premiums at the end of the year 1,801,597 (333,346) 1,468,251 87

92 14. Insurance receivables and insurance contract liabilities (continued) Insurance contract liabilities (continued) The movement of the provision for outstanding claims for the year ended 31 December is as follows: 2014 Gross Ceded Net Provision for outstanding claims at the beginning of the year 1,587,427 (151,174) 1,436,253 Claims reported during the period and changes in the estimations of provisions for outstanding claims provided at the beginning of the year 3,000,541 (264,890) 2,735,651 Claims paid during the year (Note 38) (2,516,039) 167,456 (2,348,583) Provision for outstanding claims at the end of the year 2,071,929 (248,608) 1,823, Gross Ceded Net Provision for outstanding claims at the beginning of the year 1,282,681 (121,004) 1,161,677 Claims reported during the period and changes in the estimations of provisions for outstanding claims provided at the beginning of the year 2,587,149 (169,168) 2,417,981 Claims paid during the year (Note 38) (2,282,403) 138,998 (2,143,405) Provision for outstanding claims at the end of the year 1,587,427 (151,174) 1,436, Equity accounted investees Carrying amount of equity accounted investees is summarized below: Avea 343, ,974 Solvay Şişecam 211, ,997 HNG Float Glass Limited 127, ,384 Arap Türk 111,422 96,644 Saint Gobain Glass Egypt S.A. 99,502 80,056 Radore (*) 17, İş Koray 14,341 16,802 Omco İstanbul Kalıp Sanayii ve Tic. A.Ş. 15,571 15,859 Rudnik Krecnjaka Vijenac D.O.O 16,725 16,289 OAO Form Mat 8,168 12,750 Oxyvit Kimya Sanayii ve Tic. A.Ş. 6,941 7,049 OOO Balkum 4,139 5,915 Other 1,207 1,270 Equity accounted investees 977, ,989 (*) 28.5% of shares of the Company is acquired by İş Girişim, one of the Group s subsidiaries, on 1 December

93 15. Equity accounted investees (continued) The Group s share of income in its equity accounted investees for the year ended 31 December 2014 is TL 36,565 (31 December 2013: TL 8,982 income). Summary financial information for equity accounted investees, not adjusted for the percentage ownership held by the Group is as follows: 2014 Ownership (%) Total assets Total liabilities Profit / (loss) for the year Avea (*) ,945,778 3,356,912 (443,612) Arap Türk ,905,823 3,364,304 72,127 Solvay Şişecam ,009, , ,962 Saint Gobain Glass Egypt SAE (**) , ,311 (3,661) HNG Float Glass Limited , ,631 (110) Rudnik Krecnjaka Vijenac D.O.O ,967 8,516 2,222 İş Koray ,061 12,380 (1,766) Omco İstanbul Kalıp Sanayii ve Tic. A.Ş ,102 7,959 11,063 Radore ,640 5,247 1,021 Oxyvit Kimya Sanayii Ve Tic. A.Ş. (***) ,394 9,513 3,390 OAO Form Mat ,411 1, OOO Balkum ,433 2,155 1,330 Other 11,636 8,422 1,273 13,022,411 7,305,162 (129,029) (*) The Group has significant influence on Avea by having voting rights of 20%. (**) Saint Gobain Glass Egypt S.A.E increased its capital by EGP 187,000,000 on 14 April 2014, Group contributed the capital increase of Saint Gobain Glass Egypt S.A.E by EGP 49,250,000 which lead to a decline in its shares from 30.82% to 30.00%. (***) In the ordinary shareholders general assembly meeting held on 24 March 2014, it was decided that TL 2,631 of the dividend to be paid on 15 April 2014, and the remaining TL 1,000 to be paid by 31 December The Company paid the remaining dividend on 1 September 2014 and 19 November 2014 in equal instalments. 31 December 2013 Ownership (%) Total assets Total liabilities Profit / (loss) for the year Avea (*) ,915,886 2,882,823 (428,406) Arap Türk ,466,934 2,997,236 48,534 Solvay Şişecam (**) ,007, , ,666 Saint Gobain Glass Egypt SAE (***) , ,651 (12,066) HNG Float Glass Limited (****) , ,688 (6,612) Omco İstanbul Kalıp Sanayii ve Tic. A.Ş ,148 11,430 13,150 Rudnik Krecnjaka Vijenac D.O.O ,863 10, İş Koray ,368 10,921 (3,156) OAO Form Mat ,163 1, Oxyvit Kimya Sanayii ve Tic. A.Ş ,757 9,660 4,284 OOO Balkum ,736 1, Other 9,983 7, ,484,873 6,568,049 (243,540) (*) The Group has significant influence on Avea by having voting rights of 20%. (**) Solvay Şişecam Holding AG is a private company that was founded in Vienna, Austria in order to manage Solvay Sodi A.D., located in Devnya, Bulgaria and founded based on Bulgarian Republic laws. (***) On 4 October 2012, the Group gained significant influence over the financial asset through the acquisition of additional shares from that date on it has reclassified this asset as an associate and accounted for it using the equity method. Additional, 5% of the capital of the company was acquired on 12 February 2013 for a purchase price of EURO 5,138,056. With this acquisition, the ownership rate in the associate increased to 25% from 20%. Additional, 5.82% of the capital of the company was acquired on 21 June 2013 for a purchase price of EURO 5,358,910 with this acquisition, the ownership rate in the associate increased to 30.82% from 25%. (****) 50% of shares of HNG Float Glass Limited, which is located in India, was acquired by Trakya Cam Sanayii A.Ş., one of the Group s subsidiaries, in June 2013 with a consideration of USD 61 million. 89

94 15. Equity accounted investees (continued) Summary of goodwill for equity accounted investees is as follows: Saint Gobain Glass Egypt S.A. 34,780 33,814 Radore 11, OAO Form Mat 7,212 11,610 HNG Float Glass Limited 2,130 2,006 Rudnik Krecnjaka Vijenac D.O.O. 1,045 1,088 Total goodwill for equity accounted investees 57,134 48,518 90

95 TÜRKİYE İŞ BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARES 16. Property, plant and equipment Land improvements Machinery and equipment Furniture, fixture and other fixed assets Construction in progress Land Buildings Vehicles Total Cost Balance at 1 January , ,552 5,341,416 7,484, ,699 2,727,655 1,750,126 18,239,843 Reclassifications (*) -- 9,066 (9,772) 10, ,553 Currency translation differences (6,000) (18,152) (345,567) (364,428) (3,796) (49,351) (166,020) (953,314) Additions (**) 150, , ,045 5, , ,249 1,765,206 Disposals (33,328) (673) (286,209) (104,597) (6,833) (145,896) (2,094) (579,630) (Impairment) / reversal (393) , ,744 1, ,686 Transfers 15,436 31, , ,285 8, ,585 (1,368,223) (87,538) Balance at 31 December , ,078 5,376,566 7,915, ,548 2,959,640 1,183,038 18,525,806 Depreciation Balance at 1 January (175,749) (2,532,483) (5,482,167) (259,986) (1,861,131) -- (10,311,516) Reclassifications (*) -- (3,218) 3,941 (10,094) (756) (426) -- (10,553) Currency translation differences -- 13,608 73, ,541 2,706 45, ,105 Depreciation for the year -- (23,133) (109,054) (477,279) (27,691) (308,151) -- (945,308) Disposals ,840 89,413 6,142 91, ,077 (Impairment) / reversal (1,068) -- (513) Balance at 31 December (187,941) (2,531,040) (5,639,586) (279,585) (2,034,556) -- (10,672,708) Carrying amounts at 31 December , ,137 2,845,526 2,276,267 9, ,084 1,183,038 7,853,098 (*) The Group reconsidered the fixed assets (includes fully amortized) and performed reclassifications and offsetting in the related accounts. The related fixed assets have no impact on profit/ (loss). (**) Total additions include premises and equipment obtained as collection from non-performing loans amounting to TL 225,

96 TÜRKİYE İŞ BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARES 16. Property, plant and equipment (continued) Land improvements Machinery and equipment Furniture, fixture and other fixed assets Construction in progress Land Buildings Vehicles Total Cost Balance at 1 January , ,385 5,125,815 6,919, ,665 2,295,815 1,067,696 16,243,364 Reclassifications (*) (4,011) 4,699 3,710 (125,740) (42) 5, (115,780) Currency translation differences 9,797 10, , ,292 5,311 36, , ,027 Acquisition through business combinations 11, ,875 90, ,192 1, ,314 Additions (**) 38, , ,924 6, ,749 1,399,031 2,137,071 Disposals (***) (25,989) (620) (217,042) (369,557) (7,724) (108,920) (55,799) (785,651) (Impairment) / reversal 45, , (25,435) 3, ,081 Transfers 15,411 15,140 76, ,877 1, ,972 (774,673) (51,583) Balance at 31 December , ,552 5,341,416 7,484, ,699 2,727,655 1,750,126 18,239,843 Depreciation Balance at 1 January (148,635) (2,431,721) (5,249,934) (236,488) (1,598,298) -- (9,665,076) Reclassifications (*) -- (1,187) (5,359) 127, (5,664) ,780 Currency translation differences -- (4,337) (35,414) (144,304) (3,700) (25,219) -- (212,974) Acquisition through business combinations (38,963) (73,418) (414) (23,926) -- (136,721) Depreciation for the year -- (21,720) (100,945) (406,394) (26,354) (273,380) -- (828,793) Disposals (***) , ,937 6,926 65, ,412 (Impairment) / reversal Balance at 31 December (175,749) (2,532,483) (5,482,167) (259,986) (1,861,131) -- (10,311,516) Carrying amounts at 31 December , ,803 2,808,933 2,002,099 23, ,524 1,750,126 7,928,327 (*) The Group reconsidered the fixed assets (includes fully amortized) and performed reclassifications and offsetting in the related accounts. The related fixed assets have no impact on profit/ (loss). (**)Total additions include premises and equipment obtained as collection from non-performing loans amounting to TL 170,472. (***)Total disposals include Impact of amendment in IFRS

97 TÜRKİYE İŞ BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARES 17. Intangible assets and goodwill Mine fields Development expenses Other intangible assets Rights Total Cost Balance at 1 January ,140 13,135 29, , ,355 Translation difference (2,230) (1,873) Additions 220, ,200 42, ,914 Disposals (1,211) (14,867) (16,078) Balance at 31 December ,319 13,135 40, ,026 1,127,318 Amortisation Balance at 1 January 2014 (424,930) (5,871) (10,542) (74,508) (515,851) Charge for the year (135,251) (819) (6,683) (30,453) (173,206) Translation difference 1, ,173 3,198 Disposals ,278 1,278 Balance at 31 December 2014 (559,156) (6,690) (17,225) (101,510) (684,581) Carrying amounts at 31 December ,163 6,445 23,613 78, ,737 Mine fields Development expenses Other intangible assets Rights Total Cost Balance at 1 January ,542 13,135 17, , ,296 Translation difference 8, ,655 14,002 Acquisitions through business combinations 38, ,362 39,584 Additions 204, ,397 37, ,514 Disposals (*) (20,613) (3,428) (24,041) Balance at 31 December ,140 13,135 29, , ,355 Amortisation Balance at 1 January 2013 (305,597) (5,052) (5,648) (40,030) (356,327) Charge for the year (111,872) (819) (4,894) (30,389) (147,974) Acquisitions through business combinations (17,215) (1,083) (18,298) Translation difference (3,878) (4,847) (8,725) Disposals (*) 13, ,841 15,473 Balance at 31 December 2013 (424,930) (5,871) (10,542) (74,508) (515,851) Carrying amounts at 31 December ,210 7,264 19,096 77, ,504 (*) Total disposals include Impact of amendment in IFRS-11 93

98 TÜRKİYE İŞ BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARES 17. Intangible assets and goodwill (continued) Goodwill The Group tests goodwill annually for impairment or more frequently if there are indications that goodwill might be impaired. The recoverable amount of the investment is usually determined based on independent valuation report. For the valuation, estimates of discount rates using pre-tax rates that reflect current market assessments of the time value of money and the risks specific to the investments are taken into account. An analysis of goodwill as at 31 December 2014 and 2013 is as follows: Balance as at 1 January 119, ,721 Additions (Note 6) (*) -- 3,522 Effect of movements in exchange rates (1,626) 5,789 Impairment -- (19,758) Balance as at 31 December 117, ,274 (*) Goodwill arising from the acquisition of Fritz Holding GmbH amounting to TL 3, Investment properties Cost Balance as at 1 January 1,234,728 1,256,658 Acquisitions 233, ,853 Disposals (108,824) (194,359) Reversal of impairment loss 16,315 5,106 Transfers to inventories (67,374) (35,530) Balance as at 31 December 1,308,302 1,234,728 Accumulated depreciation Balance as at 1 January (170,467) (200,890) Depreciation for the year (20,857) (20,667) Disposals 45 51,090 Balance as at 31 December (191,279) (170,467) Carrying amount as at 31 December 1,117,023 1,064,261 The property rental income earned by the Group from its investment property, all of which is leased out under operating leases amounted to TL 63,167 (31 December 2013: TL 69,764). Direct operating expenses arising on the investment property in the current period amounted to TL 21,218 (31 December 2013: TL 25,411). As of 31 December 2014, the Group's total fair value of investment property amounts to TL 2,120,108 (31 December 2013: TL 1,689,692). Appraisal reports on these properties have been prepared by the authorized real estate appraisal companies. There are no pledges on these properties. 94

99 TÜRKİYE İŞ BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARES 19. Non-current assets held for sale Balance at 1 January 103,566 73,295 Transfers 87,538 51,583 Additions 12,994 43,848 Disposals (131,451) (65,160) Balance as at 31 December 72, ,566 As of December 2013, Bank management decided to sell all Bank-owned shares of Antgıda Gıda Tarım Turizm Enerji ve Demir Çelik San. Tic. A.Ş., a subsidiary of the Bank. Accordingly, the subsidiary is presented as a disposal group held for sale and as at 31 December 2013 the disposal group comprised TL 34,917 assets and TL 17,155 liabilities held for sale. Sale process was completed in 2014 and in the table above, additions in 2013 and disposals in 2014 include amounts related to the sale. The Group s assets classified as assets held for sale primarily comprise real estates acquired by the Group against its impaired receivables. Such assets are required to be disposed of within three years following their acquisitions per the Turkish Banking Law. This three year period can be extended by a legal permission from the regulators. The related real estates subject to sale are announced on the Group s website. Announcements are made by using newspaper ads and similar media. Impairment losses provided on real estates held for sale were determined based on the appraisals of independent appraisal firms. 20. Other assets At 31 December 2014 and 2013, other assets comprised the following: Credit card receivables 817, ,602 Deposits and guarantees given 507,070 1,084,722 Prepaid expenses 359, ,927 Receivables from clearing house on derivative transactions 328, ,627 Deferred acquisition costs for insurance contracts 300, ,589 VAT deductible and carried forward 170, ,786 Receivables from clearing house 138, ,840 Advances given 111, ,165 Advances given for tangible and intangible assets 87,853 79,612 Receivables from banking services 62,483 59,978 Precious metal (Gold) 55,424 67,562 Receivables from personnel 2,075 13,298 Other assets 88, ,552 3,029,086 3,417,260 Commissions and other acquisition costs given to the intermediaries that vary with and are related to securing new contracts and renewing existing insurance contracts are capitalized as deferred acquisition cost. For the year ended 31 December 2014 and 2013, movement of deferred acquisition cost is as follows: Deferred acquisition cost at the beginning of the year 286, ,041 Commissions accrued during the year 665, ,131 Commissions expensed during the year (Note 33) (651,833) (631,583) Deferred acquisition cost at the end of the year 300, ,589 95

100 TÜRKİYE İŞ BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARES 21. Deposits At 31 December 2014 and 2013, deposits from banks comprised the following: Payable on demand 653, ,201 Term deposits 6,035,549 3,903,100 Deposits from banks 6,689,292 4,192,301 As at 31 December 2014, deposits from banks include TL accounts amounting to TL 2,899,146, (31 December 2013: TL 1,293,971) and foreign currency accounts amounting to TL 3,790,146 (31 December 2013: TL 2,898,330) in total. At 31 December 2014 and 2013, deposits from customers comprised the following: Demand Time Total Total Foreign currency deposits 11,134,596 42,235,923 53,370,519 48,910,216 Saving deposits 8,543,512 41,498,748 50,042,260 45,374,377 Commercial deposits 6,380,287 7,132,291 13,512,578 13,786,086 Public institutions and other deposits 3,341,305 4,880,524 8,221,829 7,738,999 Deposits from customers 29,399,700 95,747, ,147, ,809, Obligations under repurchase agreements The Group raises funds by selling financial instruments under agreements to repay the funds by repurchasing the instruments at future dates at the same price plus interest at a predetermined rate. Repurchase agreements are commonly used as a tool for short-term financing of interest-bearing assets, depending on the prevailing interest rates. The securities sold under repurchase agreements and corresponding obligations are as follows: Obligations under repurchase agreements 20,011,731 22,595,899 20,011,731 22,595,899 The proceeds from the sale of securities under repurchase agreements are treated as liabilities and recorded as obligations under repurchase agreements. As at 31 December 2014, the maturities of the obligations varied from two days to five years (31 December 2013: two days to six years). The underlying securities for obligations under repurchase agreements are given in Note Funds borrowed At 31 December 2014 and 2013, funds borrowed comprised the following: Short term Long term Short term Long term Funds borrowed from domestic banks and institutions 3,000,731 1,084,089 1,551, ,873 Funds borrowed from foreign banks and institutions 11,502,403 21,030,048 10,505,276 16,826,470 Funds borrowed 14,503,134 22,114,137 12,057,163 17,460,343 96

101 TÜRKİYE İŞ BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARES 23. Funds borrowed (continued) Borrowings from foreign banks and institutions include syndicated loans, securitization loans and other borrowings. Details of syndicated loans and securitized loans as at 31 December 2014 are as follows: Remaining principal Maturity USD 2 Million (1) February 2015 USD 50 Million (2) November 2016 EURO 40 Million (2) November 2016 EURO 27 Million (2) November 2016 EURO 48 Million (2) November 2018 EURO 49 Million (3) August 2024 EURO 73 Million (3) August 2024 USD 160 Million (3) August 2017 USD 46 Million (3) August 2017 USD 50 Million (4) November 2018 EURO 60 Million (4) November 2018 EURO 75 Million (4) November 2018 EURO 50 Million (4) November 2025 USD 400 Million (5) May 2015 EURO 672 Million (5) May 2015 USD 326 Million (6) September 2015 EURO 756 Million (6) September 2015 USD 30 Million (7) November 2019 USD 220 Million (7) November 2028 USD 10 Million (8) July 2015 EURO 91 Million (8) July 2015 Details of syndicated and securitised loans as at 31 December 2013 are as follows: Principal Maturity USD 32 Million (1) February 2015 USD 5 Million (1) February 2014 USD 75 Million (2) November 2016 EURO 40 Million (2) November 2016 EURO 60 Million (2) November 2016 EURO 60 Million (2) November 2018 EURO 50 Million (3) August 2024 EURO 75 Million (3) August 2024 USD 175 Million (3) August 2017 USD 50 Million (3) August 2017 USD 50 Million (4) November 2018 EURO 60 Million (4) November 2018 EURO 75 Million (4) November 2018 EURO 50 Million (4) November 2025 USD 15 Million (9) July 2014 EURO 90 Million (9) July 2014 USD 391 Million (10) September 2014 EURO 652 Million (10) September 2014 USD 16 Million (11) November 2014 USD 6 Million (12) January 2014 USD 4 Million (12) January 2014 USD 18 Million (13) May 2014 USD 13 Million (13) May 2014 USD 12 Million (13) May 2014 EURO 631 Million (14) May 2014 USD 441 Million (14) May

102 TÜRKİYE İŞ BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARES 23. Funds borrowed (continued) (1) In March 2007, the Bank utilized the DPR program once again for the additional issuance of USD 550 million by TIB Diversified Payment Rights Finance Company (USD 400 million Series 2007-A Notes, USD 150 million Series 2007-B Notes). The interest rate of the outstanding Series 2007-A is Libor+1.84%. (2) In October 2011, the Bank utilized the DPR program once again for the additional issuance of EURO 160 million and USD 75 million by TIB Diversified Payment Rights Finance Company (USD 75 million Series 2011-A Notes, EURO 40 million Series 2011-B Notes, EURO 60 million Series 2011-C Notes, EURO 60 million Series 2011-D Notes). (3) In June 2012, the Bank utilized syndicated loan agreement signed in May 2012 once again for the additional issuance of USD 225 million and EURO 125 million by TIB Diversified Payment Rights Finance Company. (EURO 50 million Series 2012-A Notes, EURO 75 million Series 2012-B Notes, USD 175 million Series 2012-C Notes, USD 50 million Series 2012-D Notes). (4) In December 2013, the Bank utilized the DPR program for the additional issuance of EURO 185 million and USD 50 million by TIB Diversified Payment Rights Finance Company (USD 50 million Series 2013-A Notes, EURO 60 million Series 2013-B Notes, EURO 75 million Series 2013-C Notes, EURO 50 million Series 2013-D Notes). (5) On 9 May 2014, the Bank has signed a syndicated loan agreement with one-year maturity in two tranches amounting to USD 400 million and EURO 672 million, with an optional one-year extension of maturity. Related loans have interest rates of Euribor+0.5% and Libor+0.5%, respectively. (6) In September 2014, the Bank has signed a syndicated loan agreement with one-year maturity in two tranches amounting to USD 326 million and EURO 756 million, with an optional one-year extension of maturity. Related loans have interest rates of Libor+0.5% and Euribor+0.5%, respectively. (7) In December 2014, the Bank utilized the a Diversified Payment Rights (DPR) program for the additional issuance of USD 220 million and USD 30 million by TIB Diversified Payment Rights (USD 220 million Series 2014-B Notes and USD 30 million Series 2014-C Notes). (8) On 8 July 2014, TSKB has signed a syndicated loan agreement with one-year maturity in two tranches amounting to EURO 91 million and USD 10 million, under the coordination Commerzbank Aktiengesellschaft. Related loans have interest rates of Euribor+0.65% and Libor+0.65%, respectively. (9) On 3 July 2013, TSKB has signed a syndicated loan agreement with one-year maturity in two tranches amounting to EURO 90 million and USD 15 million, under the coordination Commerzbank Aktiengesellschaft. Related loans have interest rates of Euribor+0.7% and Libor+0.7%, respectively. All have been totally repaid. (10) On 12 September 2013, the Bank has signed a syndicated loan agreement with one-year maturity in two tranches amounting to USD 391 million and EURO 652 million, with an optional one-year extension of maturity. Related loans have interest rates of Libor+0.3% and Euribor+0.3%, respectively. All have been totally repaid. (11) In November 2004, the Bank securitised all rights, title and interest to the USD, EURO or GBP denominated payment orders created via SWIFT MT100-category messages or similar payment orders sent or delivered through foreign depository banks under a Diversified Payment Rights securitisation program ( DPR Program ). In November 2004 under the DPR Program TIB Diversified Payment Rights Finance Company issued three Series of USDdenominated floating rate notes with a total of USD 600 million. The interest rate of the outstanding 2004-C is Libor+1.83%. All have been totally repaid. (12) In December 2005 the Bank completed a securitization transaction based on its foreign currency denominated future credit and debit card receivables from MasterCard, Cirrus, Maestro and Visa Europe Services, Inc. TIB Card Receivables Funding Company Limited issued two series of Dollar-denominated floating rate notes (USD 200 million Series 2005-A Notes and USD 150 million Series 2005-B Notes). All series have been totally repaid. (13) In June 2006 TSKB utilized the DPR program for the additional issuance of USD 800 million by TIB Diversified Payment Rights Finance Company (USD 100 million Series 2006-A Notes, USD 100 million Series 2006-B Notes, USD 150 million Series 2006-C Notes, USD 250 million Series 2006-D Notes and USD 200 million Series 2006-E Notes). All series have been totally repaid. (14) In May 2013, the Bank has signed a syndicated loan agreement with one-year maturity in two tranches amounting to USD 441 million and EURO 631 million, with an optional one-year extension of maturity. Related loans have interest rates of Libor+0.5% and Euribor+0.5%, respectively. All have been totally repaid. 98

103 TÜRKİYE İŞ BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARES 24. Debt securities issued Debt securities issued Debt securities issued Debt securities issued Currency TL USD Other currencies Maturity Interest rate (%) 31 December December 2013 January 2015 November ,146,268 5,113,368 January 2015 June ,539,609 6,007,543 January 2015 April , ,731,592 11,120,911 As of 31 December 2014, debt securities with fixed interest rate is amounting to TL 19,210,340 and variable interest rates is amounting to TL 521,252 (31 December 2013: TL 10,577,454 fixed interest rate, TL 543,457 variable interest rate). The Group has not had any defaults of principal, interest or other breaches with respect to its debt securities during the years ended 31 December 2014 and Payables to Stock Exchange Money Market Payables to Stock Exchange Money Market 2,291,363 2,403,976 2,291,363 2,403,976 As at 31 December 2014 and 2013, interest rates and maturities of payables to stock exchange money market are as follows: 2014 Description Currency type Interest rate (%) Maturity Amount Principal TL January-3 February ,280,687 Interest accruals TL 10,676 2,291, Description Currency type Interest rate (%) Maturity Amount Principal TL January 31 January ,395,567 Interest accruals TL 8,409 2,403, Trade payables At 31 December 2014 and 2013, trade payables comprised the following: Customer payables of brokerage firms 1,046,719 1,094,055 Other trade payables 668, ,643 Trade payables in manufacturing companies 659, ,852 2,374,759 2,474,550 99

104 TÜRKİYE İŞ BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARES 27. Taxation The Group is subject to taxation in accordance with the tax procedures and the legislation effective in Turkey. Corporate income tax in Turkey, is 20% on the statutory corporate income tax base, which is determined by modifying accounting income for certain exclusions and allowances for tax purposes as at 31 December 2014 (31 December 2013: 20%). Provision is made in the accompanying consolidated financial statements for the estimated charge based on the Group s results for the year. According to the Corporate Tax Law, 75% of the capital gains arising from the sale of tangible assets and investments owned for at least two years are exempted from corporate tax on the condition that such gains are reflected in the equity from the date of the sale. The remaining 25% of such capital gains are subject to corporate tax. Turkish tax legislation does not permit a parent company and its subsidiary to file a consolidated tax return. Therefore, provisions for taxes, as reflected in the accompanying consolidated financial statements, have been calculated on a separate-entity basis. In Turkey, advance tax returns are filed on a quarterly basis. Advance corporate income tax rate applied in 2014 is 20% (31 December 2013: 20%). Losses can be carried forward for offset against future taxable income for up to 5 years. However, losses cannot be carried back for offset against profits from previous periods. There is no procedure for a final and definitive agreement on tax assessments. Companies file their tax returns between 1-25 April following the close of the accounting year to which they relate. Tax authorities may, however, examine such returns and the underlying accounting records and may revise assessments within five years. Income withholding tax In addition to corporate taxes, companies should also calculate income withholding taxes and funds surcharge on any dividends distributed, except for companies receiving dividends who are resident companies in Turkey and Turkish branches of foreign companies. The rate of income withholding tax was 10% starting from 24 April This rate was changed to 15% in accordance with Article 15 of the Law No: 5520 commencing 23 July Dividends paid to the resident institutions and the institutions working through local offices or representatives in Turkey are not subject to withholding tax. As per the decisions No.2009/14593 and 2009/14594 of the Council of Ministers published in the Official Gazette No dated 3 February 2009, certain duty rates included in the articles No.15 and 30 of the new Corporate Tax Law No.5520 are revised. Accordingly, the withholding tax rate on the dividend payments other than the ones paid to the nonresident institutions generating income in Turkey through their operations or permanent representatives and the resident institutions, is 15%. In applying the withholding tax rates on dividend payments to the nonresident institutions and the individuals, the withholding tax rates covered in the related Double Tax Treaty Agreements are taken into account. Appropriation of the retained earnings to capital is not considered as profit distribution and therefore is not subject to withholding tax. Investment incentives As per the provisional Article no. 69, effective from 1 January 2006, added to the Income Tax Law no. 193 by Law no dated 8 April 2006 and published in Official Gazette no , tax payers could deduct investment incentives which were calculated according to the legislative provisions (including tax rate related provisions) in force on 31 December 2005, only from the taxable income for the years 2006, 2007, and The rights of tax payers, who could not deduct investment incentives fully or partially due to insufficient taxable income during those years, were lost as at 31 December

105 TÜRKİYE İŞ BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARES 27. Taxation (continued) Investment incentives (continued) In accordance with the decision taken by the Turkish Constitutional Court on 15 October 2009, the 2006, 2007 and 2008 clause of the provisional Article no. 69 of the Income Tax Law mentioned above, is repealed and the time limitation for the use of the investment incentive is removed. The repeal related to the investment incentive was enacted and issued in the 8 January 2010 Official Gazette number Accordingly, the Group s subsidiary operating in finance leasing business will be able to deduct its remaining investment incentives from taxable income in the future without any time limitation. As per Law regarding amendments to the Income Tax Law and Some Other Certain Laws and Decree Laws accepted on 23 July 2010 at the Grand National Assembly of Turkey, the expression of can be deducted from the earnings again in the context of this legislation (including the legislation regarding the tax rate) valid at this date has been amended as can be deducted from the earnings again in the context of this legislation (including the legislation regarding the tax rate as explained in the second clause of the temporary article no 61 of the Law) valid at this date and the following expression of Investment incentive amount used in determination of the tax base shall not exceed 25% of the associated taxable income. Tax is computed on the remaining income per the enacted tax rate has been added. This Law has been published in the Official Gazette on 1 August The clause The amount which to be deducted as investment incentive to estimate tax base cannot exceed 25% of related income which has been added to first clause of the temporary 69th article of Law No: 193 with the 5th article of Law No: 6009 on Amendments to Income Tax Law and Some Other Laws and Decree Laws has been abrogated with the 9 February 2012 dated decisions no: E.2010/93 and K.2012/20. Transfer pricing In Turkey, the transfer pricing provisions have been stated under the Article 13 of Corporate Tax Law with the heading of disguised profit distribution via transfer pricing. The General Communiqué on disguised profit distribution via Transfer Pricing sets details about implementation. If a taxpayer enters into transactions regarding sale or purchase of goods and services with related parties, where the prices are not set in accordance with arm's length principle, then related profits are considered to be distributed in a disguised manner through transfer pricing. Such disguised profit distributions through transfer pricing are not accepted as tax deductible for corporate income tax purposes. 101

106 TÜRKİYE İŞ BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARES 27. Taxation (continued) Tax applications for foreign branches and foreign operations The principal tax rates (%) of the tax authorities in each country used to calculate deferred taxes as of 31 December 2014 is as follows: Country Tax rate Bosnia Herzegovina 10.0 Bulgaria 10.0 Egypt 25.0 Georgia 15.0 Germany 15.0 Italy 31.4 Kosovo 10.0 Northern Cyprus 10.0 Romania 16.0 Russia (*) The Republic of Iraq 15.0 Ukraine 18.0 United Kingdom 21.0 (*) The tax rate in Tatarstan region of Russia is 2.0% while the tax rate in other regions is 20.0%. Tax legislation in Russia is dependent on different interpretations and changes frequently. Interpretations of tax legislation made by tax authorities regarding with the Group s activities may not be the same as management s. Deferred taxes Taxes on income for the period also comprise deferred taxes. Deferred income tax is provided, using the balance sheet method, on all taxable temporary differences arising between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax liability and asset are recognised when it is probable that the future economic benefits resulting from the reversal of temporary differences will flow to or from the Bank. Deferred tax asset is recognised to the extent that it is probable that future taxable profit will be available against which the deferred tax asset can be utilised. Currently enacted or substantively enacted tax rates are used to determine deferred taxes on income. These differences usually result in the recognition of revenue and expenses in different reporting periods for IFRS and tax purposes. For calculation of deferred tax asset and liabilities, the rate of 20% (31 December 2013: 20%) is used. Individual consolidated subsidiaries offset deferred tax asset and deferred tax liability if the deferred tax asset and deferred tax liability relate to income taxes levied by the same taxation authority. Subsidiaries that have deferred tax assets position are not netted off against subsidiaries that have deferred tax liabilities position and disclosed separately. 102

107 TÜRKİYE İŞ BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARES 27. Taxation (continued) At 31 December 2014 and 2013, tax items in the statement of financial position are as follows: Corporate tax provision 1,367, ,519 Corporate tax paid in advance (915,638) (365,114) Corporate tax liability and prepaid tax (*) 452, ,405 Other taxes and dues payable 376, ,425 Deferred tax assets (1,057,817) (994,555) Deferred tax liabilities 13,979 21,016 Deferred tax assets, net (1,043,838) (973,539) (*) Corporate tax provision amount of some subsidiaries for the year ended 31 December 2014 is less than the prepaid tax payments made within the period. Therefore, TL 35,946 is not offset and is recorded as current tax assets after deducting the corporate tax provision of those subsidiaries as at 31 December 2014 (31 December 2013: TL 27,235). Net tax amount is presented in the above table. Deferred tax assets and liabilities are attributable to the following: Provision for the pension funds (385,347) (362,428) Advance commission received (72,623) (73,141) Reserve for employee severance indemnity (149,747) (138,965) Carried forward tax losses (135,983) (115,886) Valuation difference on financial assets and liabilities (74,549) (92,289) Corporate tax allowance (195,439) (144,228) Investment incentive (19,666) (12,332) Property, plant and equipment 138, ,664 Other (148,545) (157,934) Deferred tax assets, net (1,043,838) (973,539) Movement of net deferred tax assets can be presented as follows: Deferred tax assets, net at 1 January (973,539) (918,256) Deferred income tax recognised in other comprehensive income 309,604 (330,154) Deferred tax recognised in the income statement (426,600) 271,010 Effects of exchange rates in movements 46,697 3,861 Deferred tax assets, net at the end of the year (1,043,838) (973,539) 103

108 TÜRKİYE İŞ BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARES 27. Taxation (continued) Deferred taxes (continued) An analysis of the Group s income tax expense for the year ended 31 December is as follows: Current tax expense Current period (1,469,393) (621,120) Deferred tax benefit Origination and reversal of temporary differences 426,600 (271,010) Total income tax expense (1,042,793) (892,130) Reconciliation of effective tax rate The reported taxation charge for the period ended 31 December is different than the amounts computed by applying statutory tax rate to profit before tax as shown in the following reconciliation: Amount % Amount % Profit before income tax 5,613,899 5,284,911 Income tax using the Bank s domestic tax rate 1,122, ,056, Effect of tax rates in foreign jurisdictions 9, , Share of (profit)/loss of equity accounted investees (7,313) (0.13) (1,796) (0.03) Investment incentives (9,727) (0.17) Dividend and other tax exempt income (120,102) (2.14) (170,286) (3.22) Non-deductible expenses 61, , Other (*) (13,221) (0.24) (44,135) (0.84) (*) The effect of current year unutilized tax losses and consolidation adjustments are included. 1,042, , Expiration schedule of carry forward tax losses As at 31 December 2014, the Group has deductable tax losses amounting TL 894,171 (31 December 2013: TL 763,209). The Group has recognised deferred tax assets on tax losses amounting TL 687,019 because it is probable that future taxable profit will be available in accordance with the Group s projections (31 December 2013: TL 611,228). Expiration schedule of carry forward tax losses which are considered in deferred tax calculation is as follows: Up to 1 year 1,597 31,498 Up to 2 years 80,047 2,617 Up to 3 years 33,068 15,995 Up to 4 years 81, ,060 5 years and above 491, , , ,228 The Group has not recognised deferred tax assets on tax losses amounting TL 207,152 because it is not probable that future taxable profit will be available against which the Group companies can utilize the benefits thereafter (31 December 2013: TL 151,981). 104

109 TÜRKİYE İŞ BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARES 28. Provisions At 31 December 2014 and 2013, provisions comprised provision for general banking risks, provision for non-cash loans, credit card bonus provision and other provisions. The movement of the provisions during the year ended 31 December was as follows: Provision for general banking risks (*) Provision for non-cash loans Credit card bonus provision Other provisions Balance as at 1 January ,000 88,971 62, ,904 1,366,673 Provision set during the year -- 42,732 7, , ,598 Payments and reversals -- (65,784) (1,823) (230,065) (297,672) Effects of exchange rates in movements (1,133) -- (1,133) Balance as at 31 December ,000 65,919 67, ,344 1,228,466 Total Provision for general banking risks (*) Provision for non-cash loans Credit card bonus provision Other provisions Total Balance as at 1 January , ,569 53, ,058 1,192,069 Provision set during the year -- 70,494 9, , ,872 Payments and reversals -- (84,092) -- (79,523) (163,615) Effects of exchange rates in movements Balance as at 31 December ,000 88,971 62, ,904 1,366,673 (*) Provision for general banking risks amounting to TL 855,000 provided by the Group management considering the potential circumstances which may arise from any changes in the economy or market conditions. 105

110 TÜRKİYE İŞ BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARES 28. Provisions (continued) Tax audit As announced by material event disclosures dated 31 December 2012, an inspection, which is related to payments (contributions) made by Bank to Türkiye İş Bankası A.Ş. Mensupları Munzam Sosyal Güvenlik ve Yardımlaşma Sandığı Vakfı which is founded according to Turkish Commercial Law and Civil Law, was conducted by the Bank Tax Audit Committee Inspectors for fulfilling its obligations within the framework of the Foundation Share and the relevant legislation. As a result of this interview, the amount of the related liability is a benefit with the nature of wage for the foundation members who work at the period of payment. Thus the inspection report was prepared with the claim of getting suspended income tax stoppage on payments/stamp duty on behalf of penalty for the years 2007 and According to this report, the tax penalty notice with the total amount of TL 74,353, which is the calculation of the suspended income tax/stamp duty, was served to the Bank. Consideration related to subject, the Bank's implementation comply with the legislation, conclusion that, there is no legal basis has been reached. Across the country the lawsuit was filed against the mentioned assessments in various tax courts and the cases brought to the tax courts of the first instance, a part of decision has been decided in against of the Bank, a part of decision has been decided in favor of the Bank. On the other hand, as announced by material event disclosures dated 19 December 2013, in the mentioned year on the same subject relating to tax inspection reports 2009, 2010 and 2011 periods suspended for income tax, stamp tax assessments held, and tax penalties of the notification is in progress at this time. According to this report, total tax and penalty TL 152,383 notified to the Bank. Besides the Bank, inspections were conducted by Tax Audit Committee Inspectors regarding the contributions of TSKB, Milli Reasürans and Anadolu Sigorta for the period for their supplementary pension funds which are founded according to Turkish Commercial Law and Civil Law. As a result of the issued report that companies a total of TL 33 million (exact amount) tax penalty notices were notified. Assessments made on the subject by the company s application in accordance with the legislation, which was suspended for Tax Administration concluded that the lack of legal basis of assessment and said assessment were filed in court against the various tax. A number of cases concluded in favor of the Bank, another part of lawsuits concluded against the Bank but portion of the case has not been concluded yet. In this context, for the finalized decisions of Regional Administrative Courts related to the years 2007 and 2008 against the Bank, the Bank applied to the Constitutional Court. As considering one of the Bank s applications, the Constitutional Court made its decision court file numbered 2014/6192 amounting to TL 39, (full TL). The court decision dated 12 November 2014 appeared in the official gazette dated 21 February 2015 and numbered According to this decision, there is no predictability in legal conformity for taxing the Bank's contributions to the Pension Fund in terms of wage base and for this reason it was accepted that property right of the Bank has been violated according to the 35th article of Constitution. Finally the Court decided that the amount of tax, penalties and default interest which was paid by the Bank should be paid back to the Bank as for compensation with its legal interest. According to the decision of the Constitutional Court, it is expected that the cases related to the periods 2007, 2008, 2009, 2010 and 2011 will conclude in favor of the Bank. In this context, the provisions which had been allocated for the mentioned periods ( ), is reversed. The path to be followed for other provisions, allocated for the same reason within the scope of accounting standards for the year 2012 and subsequent periods, will be determined depending on the process. In this regard, for the above mentioned periods ( ), effects of this court case is assessed as an adjusting event and previously recognised provisions are adjusted accordingly in 2014 financial statements. 106

111 TÜRKİYE İŞ BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARES 29. Employee benefits Provision for defined benefit plans 1,926,738 1,812,155 Reserve for employee severance indemnity and vacation pay liability 828, ,499 Total employee benefits 2,755,540 2,533,654 Provision for defined benefit plans Employees of the Bank are members of Türkiye İş Bankası A.Ş. Mensupları Emekli Sandığı Vakfı, employees of Milli Reasürans are members of Milli Reasürans Türk Anonim Şirketi Emekli ve Sağlık Sandığı Vakfı, employees of TSKB are member of Türkiye Sınai Kalkınma Bankası Memur ve Müstahdemleri Yardım ve Emekli Vakfı and employees of Anadolu Sigorta are members of Anadolu Anonim Türk Sigorta Şirketi Memurları Emekli Sandığı Vakfı (collectively the Funds ), which are established in accordance with the temporary Article 20 of the Social Security Act No: 506 and separate legal entities and foundations recognised by an official decree, providing all qualified employees with pension and post-retirement benefits. As per the provisional Article No: 23 of the Banking Law No: 5411, pension funds which were established within the framework of Social Security Institution Law, should be transferred to the Social Security Institution within three years after the publication of the prevailing Banking Law enacted on 1 November Methods and principles related to the transfer have been determined as per the Cabinet decision no: 2006/11345 published on 30 November However, the said article of the Banking Law has been vetoed by the President on 2 November 2005 and the execution of the article was ceased based on the Supreme Court s decision numbered E.2005/39, K.2007/33 and the decision has been cancelled from the date of publication. Following annulment of the temporary Article 23 of the Banking Law, the new law Amendments to the Social Security and General Health Insurance Act Including Certain Laws and Decrees was published in the Official Gazette dated 8 May 2008 and came into force. The new law decrees that the contributors of the Bank pension funds, the ones who receive salaries or income from these funds and their rightful beneficiaries will be transferred to the Social Security Institution and will be subject to this Law within 3 years after the release date of the related article, without any need for further operation. Three-year transfer period can be prolonged for maximum 2 years by the Cabinet decision. However related transfer period has been prolonged for 2 years by the Cabinet decision dated. 14 March 2011, which was published on the Official Gazette dated 9 April 2011 and numbered In addition, by the Law Emendating Social Security and General Health Insurance Act, which was published on the Official Gazette dated 8 March 2012 and numbered 28227, this period of 2 years has been raised to 4 years. After that related transfer period has been prolonged for one more year by the Cabinet decision dated 8 April 2013, which was published on the Official Gazette dated 3 May 2013 and numbered also this period has revalidated one more year by the Cabinet decision dated 24 February 2014, which was published on the Official Gazette dated 30 April 2014 and numbered The Council of Ministers has been lastly authorized to determine the transfer date in accordance with the last amendment in the first paragraph of the 20th provisional article of Law No implemented by the Law No on Amendment of the Occupational Health and Safety Law and Other Laws and Decree Laws published in the Official Gazette dated 23 April 2015 and numbered The above mentioned law also includes the following: - technical deficit rate of 9.8% shall be used in the actuarial calculation of the value in cash, and - uncovered other rights and compensations of participants or beneficiaries of pension funds should be covered by the entities who transfer the funds. 107

112 TÜRKİYE İŞ BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARES 29. Employee benefits (continued) On the other hand, the application made on 19 June 2008 by the Republican People s Party to the Constitutional Court for the annulment and motion for stay of some articles, including the first paragraph of the provisional Article 20 of the Law, which covers provisions on transfers, was rejected in accordance with the decision taken at the meeting of the afore-mentioned court on 30 March An actuarial report has been obtained from registered actuary regarding calculation of the amount to be paid to the Social Security Institution by the Group in accordance with the new law. The CSO 1980 mortality table, 9.8% of technical deficit interest rate and 34.5% of premium rate are taken into account in the calculation of the said technical deficit. Those assumptions are specified in the law and are the same in comparative period. After the transfer of benefit plans, the currently paid health benefits will be determined within the framework of the Social Security Institution legislation and other regulations. At 31 December 2014 and 2013, technical deficit from pension funds comprised the following: 2014 The Bank Milli Reasürans Total Net present value of total liabilities other than health (5,397,570) (85,240) (5,482,810) Net present value of insurance premiums 2,433,204 15,750 2,448,954 Net present value of total liabilities other than health (2,964,366) (69,490) (3,033,856) Net present value of health liabilities (726,581) (9,900) (736,481) Net present value of health premiums 1,382,502 8,633 1,391,135 Net present value of health liabilities 655,921 (1,267) 654,654 Pension fund assets 410,038 42, ,464 Amount of actuarial and technical deficit (1,898,407) (28,331) (1,926,738) 2013 The Bank Milli Reasürans Total Net present value of total liabilities other than health (4,900,737) (75,086) (4,975,823) Net present value of insurance premiums 2,173,772 14,131 2,187,903 Net present value of total liabilities other than health (2,726,965) (60,955) (2,787,920) Net present value of health liabilities (660,534) (12,130) (672,664) Net present value of health premiums 1,235,098 7,744 1,242,842 Net present value of health liabilities 574,564 (4,386) 570,178 Pension fund assets 376,562 29, ,587 Amount of actuarial and technical deficit (1,775,839) (36,316) (1,812,155) 108

113 TÜRKİYE İŞ BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARES 29. Employee benefits (continued) Plan assets as at 31 December 2014 and 2013 are comprised of the following items: 2014 The Bank Milli Reasürans Total Cash and cash equivalents 243,003 36, ,079 Securities portfolio 116,934 6, ,127 Properties 2, ,282 Other 47, ,976 Total plan assets 410,038 42, , The Bank Milli Reasürans Total Cash and cash equivalents 253,716 3, ,375 Securities portfolio 96,722 6, ,717 Properties 2,282 18,270 20,552 Other 23, ,943 Total plan assets 376,562 29, ,587 The assets of Anadolu Anonim Türk Sigorta Şirketi Memurları Emekli Sandığı (Pension Fund of Anadolu Sigorta) and Türkiye Sınai Kalkınma Bankası Memur ve Müstahdemleri Yardım ve Emekli Vakfı (Pension Fund of TSKB) exceed their defined benefit obligations and therefore there is no additional liability calculated for these Funds on the Group. Up to date, there has not been any deficit in Türkiye İş Bankası A.Ş. Mensupları Munzam Sosyal Güvenlik Yardımlaşma Sandığı Vakfı (Supplementary Pension Fund of İşbank Members), which has been founded by the Bank employees in accordance with the provisions of the Civil Code which provides subsequent retirement benefits; and the Group has made no payment for this purpose. It is believed that the assets of this institution are adequate enough to cover its total obligations; therefore the Fund is not expected to create any additional liability on the Group. The same is valid for the supplementary pension funds of TSKB, Milli Reasürans and Anadolu Sigorta, which are among the other financial institutions of the Group. Reserve for employee severance indemnity Under the Turkish Labour Law, the Bank and its Turkish subsidiaries are required to pay termination benefits to each employee who has completed one year of service and whose employment is terminated without due cause, is called up for military service, dies or who retires after completing 25 years of service (20 years for women) and reaches the retirement age (58 for women and 60 for men). Since the legislation was changed on 8 September 1999, there are certain transitional provisions relating to length of service prior to retirement. Such payments are calculated on the basis of 30 days pay per year of employment at the rate of pay applicable at the date of retirement or termination. Reserve for retirement pay liability is computed and reflected in the consolidated financial statements on a current basis. The calculation was based upon the retirement pay ceiling announced by the Government (full TL 3,438 as at 31 December 2014; full TL 3,254 as at 31 December 2013). 109

114 TÜRKİYE İŞ BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARES 29. Employee benefits (continued) IFRS require actuarial valuation methods to be developed to estimate the enterprise s obligation under defined benefit plans. Accordingly, the following actuarial assumptions are used in the calculation of the total liability: The principal assumption is that the maximum liability for each year of service will increase in line with inflation. Thus, the discount rate applied represents the expected real rate after adjusting for the anticipated effects of future inflation. Consequently, in the accompanying consolidated financial statements as at 31 December 2014, the provision has been calculated by estimating the present value of the future probable obligation of the Group arising from the retirement of the employees. The provision at 31 December 2014 has been calculated assuming an annual inflation rate between 3.10% 7.00% and a discount rate between 8.51% 8.98% resulting in a real discount rate between 1.41% - 5.7% (31 December 2013: annual inflation rate between 5.94% 7.50 and a discount rate between 9.54% 9.85% resulting in a real discount rate between 3.21% %). It is planned that retirement rights will be paid to employees at the end of concession periods. Accordingly, present value of the future probable obligation has been calculated based on the concession periods. The amount of the reserve for employee severance indemnity during the year ended 31 December was as follows: Balance at 1 January 671, ,054 Service cost 81,212 79,139 Interest cost 47,812 40,955 Effect of acquisition of subsidiary -- 1,454 Effects of change in foreign exchange rate Actuarial difference 61,782 (36,523) Payments made during the year (95,336) (59,732) Balance as at 31 December 766, ,063 Vacation pay liability 62,127 50,436 Total 828, , Other liabilities Credit card payables to affiliated merchants 3,595,477 3,114,503 Deposits and advances taken for imports 1,309,003 3,028,168 Payable to personnel 838, ,773 Payables to clearing accounts 647, ,310 Expense accruals 211, ,821 Payables to funds 141, ,746 Unearned revenue 124,485 62,367 Payment orders 97,336 99,683 Blocked money 82, ,224 Cash guarantees 65,960 41,798 Other 843, ,915 Other liabilities 7,956,823 8,363,

115 TÜRKİYE İŞ BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARES 31. Subordinated liabilities Interest Rate Years of maturity USD 1,000 million coupon fixed interest rate 6.00% October ,334,846 2,135,520 USD 400 million coupon fixed interest rate 7.85% December , ,623 USD 50 million variable interest rate Libor+3.00% October , ,759 Subordinated liabilities 3,384,849 3,090,902 On 24 October 2012, the Bank issued 10-year-term bond with a nominal value of USD 1,000 million, as a subordinated liability. The bond is issued for the individual and legal persons who are resident abroad, with maturity of 24 October 2022 and 6.00% interest rate. On 10 December 2013, the Bank issued 10-year-term bond with a nominal value of USD 400 million, as a subordinated liability. The bond is issued for the individual and legal persons who are resident abroad, with maturity of 10 December 2023 and 7.85% interest rate. On 05 November 2004, TSKB, a subsidiary of the Group, has obtained a 12-year subordinated loan of USD 50 million with maturity of 15 October 2016 from International Finance Corporation, with an interest of Libor+3.00%; which corresponds to 3.32% as at the reporting date. Principal will be paid at the end of the maturity. The above liabilities will, in the event of the winding-up of the issuer, be subordinated to the claims of depositors and all other creditors of the issuer. The Group has not had any defaults of principal, interest or other breaches with respect to its subordinated liabilities. 32. Capital and reserves The Bank s share capital is divided into Group A, Group B and Group C shares. With nominal values of full 1 Kurus Group A shares have the privileges: - to obtain 20 times share at the distribution of bonus shares issued from conversion of extraordinary reserves and revaluation funds generated in accordance with the relevant laws (Article 18 of the Articles of Incorporation) - to exercise 20 times of pre-emption rights (Article 19 of the Articles of Incorporation) - for 20 voting rights (Article 49 of the Articles of Incorporation) Despite having a lower nominal value, Group (B) shares, each with a nominal value of 1 Kurus, have the same rights with the Group (C) shares having a nominal value of 4 Kurus each. Furthermore, Group (A) and (B) shares, each with a nominal value of 1 Kurus, are granted privileges in distribution of profits pursuant to Article 58 of the Articles of Incorporation. The Bank has accepted the registered capital system set out in accordance with the Law No: 2499 of the Capital Markets Board. The registered capital of the Bank is TL 10,000,

116 TÜRKİYE İŞ BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARES 32. Capital and reserves (continued) Authorized and nominal paid in capital can be analysed as follows: Group Par Value Full TL Authorized Paid-in Authorized Paid-in A B C ,499,970 4,499,970 4,499,970 4,499,970 The shareholders structure of the Bank is presented below: 4,500,000 4,500,000 4,500,000 4,500,000 Paid-up capital (%) Paid-up capital (%) Supplementary Pension Fund of İşbank Members 2,455, ,456, Republican People's Party ( CHP ) 1,717, ,717, Publicly traded 1,942, ,941, Share premium 6,115, ,115, Excess amount of selling price and nominal value for each share was recorded as share premium in equity. Legal reserves The legal reserves consist of first and second legal reserves in accordance with the Turkish Commercial Code. The first legal reserve is appropriated out of the statutory profits at the rate of 5%, until the total reserve reaches a maximum of 20% of the entity s share capital. The second legal reserve is appropriated at the rate of 10% of all distributions in excess of 5% of the entity s share capital. The first and second legal reserves are not available for distribution unless they exceed 50% of the share capital, but may be used to absorb losses in the event that the general reserve is exhausted. As at 31 December 2014, the Group has legal reserves amounting to TL 2,912,743 (31 December 2013: TL 2,657,122). Fair value reserve The fair value reserve includes the cumulative net change in the fair value of available-for-sale investments, excluding impairment losses, until the investment is derecognised. Hedging reserve The hedging reserve comprises the effective portion of the cumulative net change in the fair value of the hedging instruments used in cash flow hedges pending subsequent recognition in profit or loss as the hedged cash flows affect profit or loss. Translation reserve The translation reserve comprises all foreign currency differences arising from the translation of the financial statements of foreign operations. 112

117 TÜRKİYE İŞ BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARES 32. Capital and reserves (continued) Dividends Regarding the profit for the year 2013, at the Ordinary General Assembly of the Bank held on 28 March 2014, it was decided to distribute a dividend of TL 649,410 to Group A, Group B and Group C shareholders, founder shareholders, Board of Directors, management and personnel and to allocate TL 201,836 to legal reserves from retained earnings. According to Turkish legislation, unconsolidated current year profit is used or profit distribution. 33. Net fee and commission income An analysis of the Group s net fee and commission income for the year ended 31 December is as follows: Fee and commission income Credit card fees and commission 966, ,546 Customer investigation charges 110, ,458 Non-cash loan commission 296, ,049 Collection and payment commissions 143, ,370 Bank account charges 196, ,762 Brokerage 78, ,028 Money transfer charges 203, ,502 Mutual funds portfolio management commission 113, ,167 Commission income from reinsurers 63,782 72,497 Other 252, ,970 Total fee and commission income 2,424,903 2,400,349 Fee and commission expense Deferred acquisition costs (Note 20) (651,833) (631,583) Brokerage and other commission (17,125) (139,230) Commissions given for credit cards (221,879) (128,154) Stock exchange operations commission (29,306) (20,432) Total fee and commission expense (920,143) (919,399) Net fee and commission income 1,504,760 1,480, Income from manufacturing operations An analysis of the Group s income from manufacturing operations for the year ended 31 December is as follows: Foreign sales 3,681,181 3,056,510 Domestic sales 3,601,169 3,246,594 Other income from manufacturing operations 6,548 11,612 Sales returns (35,627) (26,361) Sales discounts (267,205) (261,277) Other discounts (112,334) (72,891) Total income from manufacturing operations 6,873,732 5,954,

118 TÜRKİYE İŞ BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARES 35. Income from insurance operations Premiums earned (Note 14) 3,333,225 3,000,199 - Premiums earned, gross (Note 14) 4,153,519 3,735,659 - Premiums earned, ceded (Note 14) (820,294) (735,460) Pension business technical income 112, ,977 Other technical income 53,123 67,922 Change in life mathematical provisions 13, Change in Life Mathematical Provisions, gross 14, Change in Life Mathematical Provisions, ceded (777) -- Income from insurance operations 3,512,906 3,184, Other operating income An analysis of the Group s other operating income for the year ended 31 December is as follows: Reversal of excess provision 219, ,576 Gain on sale of premises and equipment (net) 69, ,492 Insurance refund 20,758 1,819 Other 324, ,328 Total other operating income 634, , Cost of manufacturing operations An analysis of the Group s cost of manufacturing operations for the year ended 31 December is as follows: Direct materials 2,335,599 1,984,366 Production overheads 1,324,390 1,237,307 Depreciation and amortisation expenses 613, ,973 Direct labour 412, ,421 Cost of merchandises sold 357, ,494 Cost of construction 67,165 55,256 Cost of services given 2,129 9,197 Change in work-in-progress inventories 11,746 (4,453) Change in finished goods inventories (144,475) (46,783) Total manufacturing operations cost 4,980,249 4,458, Cost of insurance operations Claims paid (Note 14) 2,348,583 2,143,405 -Claims paid, gross (Note 14) 2,516,039 2,282,403 -Claims paid, ceded (Note 14) (167,456) (138,998) Change in provisions for outstanding claims 396, ,334 Change in other technical provisions 50,218 12,423 Change in life mathematical provisions -- 2,334 -Change in life mathematical provisions, gross -- 3,804 -Change in life mathematical provisions, ceded -- (1,470) Cost of insurance operations 2,795,791 2,433,

119 TÜRKİYE İŞ BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARES 39. Other operating expenses An analysis of the Group s other operating expenses for the year ended 31 December is as follows: General administrative expenses 5,866,245 5,487,327 Marketing, selling and distribution expenses 917, ,361 Provision expenses, net 402, ,312 Deposit insurance premium expense 280, ,729 Research and development expenses 72,474 53,847 Total of other operating expenses 7,538,721 6,991,576 An analysis of the Group s general administrative expenses for the year ended 31 December is as follows: General administrative expenses Salaries and employee benefits 3,379,255 3,015,671 Depreciation and amortisation expenses 429, ,487 Rent expense 289, ,282 Administration expenses 394, ,416 Communication expense 141, ,612 Judiciary expenses 153,755 93,944 Maintenance expense 89,057 68,637 Outsourcing services 64,599 66,030 Taxation expense other than income 73,759 63,145 Other 851,848 1,078,103 Total general administrative expenses 5,866,245 5,487, Income and cost from other operations An analysis of the Group s income and cost from other operations for the year ended 31 December is as follows: Income from other operations Income from sales of property equipment of real estate firms 106, ,309 Income from medical services 100,855 86,506 Rent income from investment property of real estate firms 63,167 69,764 Income from shipping services 40,814 37,456 Other services rendered 292, ,721 Total income from other operations 603, ,756 Cost of other operations Cost from medical services (158,458) (153,698) Cost from sales of property equipment of real estate firms (98,567) (199,665) Cost of shipping services (50,555) (54,080) Depreciation and amortisation expenses (20,431) (19,259) Cost of rent from investment property of real estate firms (8,890) (5,235) Other services rendered (370,221) (308,332) Total cost of investment and other operations (707,122) (740,269) 115

120 TÜRKİYE İŞ BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARES 41. Impairment losses on financial assets, net An analysis of the Group s provision for impairment on loans for the year ended 31 December is as follows: Impairment on loan losses (1,013,261) (978,436) Collection and reversal of loan losses 255, ,328 Impairment losses on factoring receivables (net of collections/recoveries) (9,784) (3,662) Impairment losses on finance lease receivables (net of collections/recoveries) (27,489) (14,765) Impairment losses on non-cash loans (net of collections/recoveries) 23,052 (13,598) Impairment losses on loans and advances (771,923) (374,133) 42. Segment reporting The Group is organized in two main business segments as described below, which are the Group s strategic business units: Banking and non-banking. The strategic business units offer different products and services, and are managed separately based on the Group s management and internal reporting structure. For each of the strategic business units, the Board of Directors reviews internal management reports on at least a semiannually basis. Banking segment includes corporate, retail and private banking, as well as treasury. Non-banking operations are followed according to insurance, investment and finance and manufacturing and trading segments. The following summary describes the operations in each of the Group s reportable segments: Banking business The Group provides services to the large corporations, SMEs and other trading companies (excluding real trading persons) within the course of its corporate and commercial operations through various financial media. Services such as project financing, operating and investment loans, deposit and cash management, credit cards, cheques and bills, foreign trade transactions and financing, letter of guarantee, letter of credit, forfeiting, foreign currency trading, bill collections, payrolls, investment accounts, tax collections and other banking services are being provided for the aforementioned customer segments. Services are being provided to individuals, real trading persons and non-trading corporations and institutions within the context of Retail Banking. This customer segment s requirements are met by banking services such as deposits, consumer loans, overdraft accounts, credit cards, bill collections, remittances, foreign currency trading, safe-deposit boxes, insurance, tax collections, investment accounts and by other banking services. As for the private banking category, any kind of financial and cash management services are provided for individuals in the high-income group. Within the context of treasury transactions, medium and long term funding is being fulfilled by tools such as security trading, money market transactions, spot and installment based TL and foreign currency trading, and derivative transactions such as forward, swap, futures and options, as well as syndication and securitization. All other banking segments include combined information about operating segments that do not meet the quantitative thresholds. 116

121 TÜRKİYE İŞ BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARES 42. Segment reporting (continued) Non-banking business Insurance segment includes the Group s insurance and reinsurance activities. Investment and finance operations include the Group s leasing, factoring, brokerage, corporate finance, investment advisory, private portfolio management and real estate investment activities. Core business of the manufacturing, trading and service segment is mainly glass production. In addition, complementary industrial and commercial operations related to glass production are included into manufacturing and trading segment as well as food production operations. Information regarding the results of each reportable segment is included below. Performance is measured based on segment profit before income tax, as included in the internal management reports that are reviewed by the Board of Directors. Segment profit is used to measure performance as management believes that such information is the most relevant in evaluating the results of certain segments relative to other entities that operate within these industries. Inter-segment pricing is determined on an arm s length basis. Measurement of segment assets and liabilities and operating segment results is based on the accounting policies set out in the accounting policy notes. 117

122 TÜRKİYE İŞ BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARES 42. Segment reporting (continued) Based on the internal reporting, the Group reports to the management based on the IFRS figures. Banking business Corporate Commercial Retail Private Treasury investment All other banking segments Insurance Non-banking business Investment and finance Manufacturing, trading and service Combined Consolidation adjustments Total At 31 December 2014 Total assets 62,616,334 64,034,399 36,598, ,548 57,652,494 33,976,790 9,140,909 13,539,079 20,754, ,563,078 (27,315,182) 271,247,896 Total liabilities and equity 29,378,678 27,546,652 59,404,921 17,447,516 62,515,541 58,822,675 9,140,909 13,551,780 20,754, ,563,078 (27,315,182) 271,247,896 At 31 December 2013 Total assets 54,080,764 53,516,195 33,760, ,812 51,346,052 31,915,147 8,259,410 11,892,437 19,766, ,038,811 (24,378,121) 240,660,690 Total liabilities and equity 27,757,598 24,758,068 48,623,169 22,226,914 52,671,682 49,082,427 8,259,410 11,892,726 19,766, ,038,811 (24,378,121) 240,660,

123 TÜRKİYE İŞ BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARES 42. Segment reporting (continued) 1 January - 31 December 2014 Banking business Income statement Corporate Commercial Retail Private Treasury investment All other banking segments Insurance Non-banking business Investment and finance Manufacturing, trading and service Combined Consolidation adjustments Interest income 3,246,283 5,920,266 3,874,337 23,248 3,679, , , , ,154 18,224,916 (435,944) 17,788,972 Interest expense (943,535) (931,037) (2,434,593) (1,034,964) (3,037,646) (564,725) (37) (575,190) (338,171) (9,859,898) 432,795 (9,427,103) Net interest income 2,302,748 4,989,229 1,439,744 (1,011,716) 641,609 (275,065) 402,795 (19,309) (105,017) 8,365,018 (3,149) 8,361,869 Fee and commission income 326,434 1,133, ,869 11, ,246 63, ,879 20,049 2,603,254 (178,351) 2,424,903 Fee and commission expense (481) (1,181) (70) -- (1,260) (330,898) (707,528) (32,680) (20,346) (1,094,444) 174,301 (920,143) Net fee and commission income 325,953 1,132, ,799 11,742 (700) (305,652) (643,746) 110,199 (297) 1,508,810 (4,050) 1,504,760 Securities trading income, net , ,469 22, , , ,099 Derivative trading income / (expense), net (942,050) , (621,263) 6,520 (614,743) Income from manufacturing operations ,246,437 11,246,437 (4,372,705) 6,873,732 Income from insurance operations ,552, ,552,921 (40,015) 3,512,906 Income from other operations , , ,659 (316,853) 603,806 Cost of manufacturing operations (9,183,378) (9,183,378) 4,203,129 (4,980,249) Cost of insurance operations (2,790,887) (2,790,887) (4,904) (2,795,791) Cost of other operations (272,237) (434,885) (707,122) -- (707,122) Other operating income 25, , , ,463 44,012 49,845 28, , ,397 (125,978) 634,419 Other operating expense (119,372) (679,388) (1,413,959) (11,930) (136,319) (3,279,957) (474,099) (357,289) (1,766,710) (8,239,023) 700,302 (7,538,721) Foreign exchange gains / (losses), net ,929 (1,567) 11,941 (111,160) 595,143 (37) 595,106 Impairment losses on loans and advances, net (763,821) -- (49,850) -- (813,671) 41,748 (771,923) Dividend income ,550 44,697 58, ,195 1,024,547 (1,003,361) 21,186 Share of losses of equity accounted investees ,335 36,565 Profit / (loss) before taxation 2,534,689 5,560,932 1,033,457 (1,011,663) 69,907 (3,265,004) 234, ,914 1,033,863 6,496,917 (883,018) 5,613,899 Income tax expense (872,237) -- (38,274) (23,613) (87,847) (1,021,971) (20,822) (1,042,793) Net profit / (loss) 2,534,689 5,560,932 1,033,457 (1,011,663) (802,330) (3,265,004) 196, , ,016 5,474,946 (903,840) 4,571,106 Equity holders of the Bank ,050, , , ,016 5,477,652 (1,717,795) 3,759,857 Non-controlling interest (2,706) -- (2,706) 813, ,249 Total 119

124 TÜRKİYE İŞ BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARES 42. Segment reporting (continued) 1 January 31 December 2013 Banking business Non-banking business Treasury Investment Consolidation Income statement Corporate Commercial Retail Private investment Insurance and finance Combined adjustments Total Interest income 2,740,129 4,650,796 3,250,790 39,690 3,292, , , , ,890 15,168,413 (352,464) 14,815,949 All other banking segments Manufacturing, trading and service Interest expense (1,017,314) (739,619) (1,698,923) (1,086,472) (1,937,726) (517,797) (2,279) (345,779) (245,375) (7,591,284) 304,952 (7,286,332) Net interest income 1,722,815 3,911,177 1,551,867 (1,046,782) 1,354,735 (275,250) 381,306 67,746 (90,485) 7,577,129 (47,512) 7,529,617 Fee and commission income 298, , ,109 22,837 (119) 25,135 77, ,397 16,292 2,556,233 (155,884) 2,400,349 Fee and commission expense (676) (1,238) (150) -- (640) (231,614) (682,104) (133,504) (10,942) (1,060,868) 141,469 (919,399) Net fee and commission income 298, , ,959 22,837 (759) (206,479) (605,003) 125,893 5,350 1,495,365 (14,415) 1,480,950 Securities trading income, net , ,362 (5,389) 477, ,170 (262,143) 388,027 Derivative trading income / (expense), net (254,879) -- (1,942) (249,110) -- (505,931) 5,167 (500,764) Income from manufacturing operations ,698,039 9,698,039 (3,743,852) 5,954,187 Income from insurance operations ,200, ,200,123 (16,025) 3,184,098 Income from other operations , ,028 1,047,535 (267,779) 779,756 Cost of manufacturing operations (8,035,346) (8,035,346) 3,576,568 (4,458,778) Cost of insurance operations (2,437, (2,437,788) 4,292 (2,433,496) ) Cost of investment and other operations (371,979) (386,710) (758,689) 18,420 (740,269) Other operating income 29,902 83, , , ,549 23,512 13, , ,510 (225,295) 726,215 Other operating expense (88,163) (814,927) (1,453,675) (28,826) (108,909) (2,800,900) (411,004) (328,649) (1,457,046) (7,492,099) 500,523 (6,991,576) Foreign exchange gains / (losses), net ,958 12, ,544 26, ,368 (120) 704,248 Impairment losses on loans and advances, net (348,241) -- (25,892) -- (374,133) -- (374,133) Dividend income ,627 44,714 74, , ,322 (840,475) 27,847 Share of gains of equity accounted investees , ,745 4,237 8,982 Profit / (loss) before taxation 1,962,781 4,155,698 1,095,863 (1,052,741) 1,254,451 (2,704,736) 223, ,276 1,341,776 6,593,320 (1,308,409) 5,284,911 Income tax expense (783,161) -- (36,622) (21,767) (52,133) (893,683) 1,553 (892,130) Profit for the year 1,962,781 4,155,698 1,095,863 (1,052,741) 471,290 (2,704,736) 187, ,509 1,289,643 5,699,637 (1,306,856) 4,392,781 Equity holders of the Bank ,928, , ,254 1,289,643 5,701,382 (2,012,737) 3,688,645 Non-controlling interest (1,745) (1,745) 705, ,

125 TÜRKİYE İŞ BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARES 42. Segment reporting (continued) Geographic information Financial position Turkey Europe Russia Other Combined Consolidation adjustments Consolidated At 31 December 2014 Assets 289,390,337 6,583,582 2,510,646 78, ,563,078 (27,315,182) 271,247,896 Liabilities 239,292,376 3,727,189 2,030, , ,188,341 (9,477,104) 235,711,237 Total equity 50,097,961 2,856, ,391 (60,008) 53,374,737 (17,838,078) 35,536,659 Total liabilities and equity 289,390,337 6,583,582 2,510,646 78, ,563,078 (27,315,182) 271,247,896 Financial position Turkey Europe Russia Other Combined Consolidation adjustments Consolidated At 31 December 2013 Assets 255,861,166 6,243,884 2,794, , ,038,811 (24,378,121) 240,660,690 Liabilities 213,507,941 3,404,686 2,374, , ,469,418 (8,932,841) 210,536,577 Total equity 42,353,225 2,839, ,257 (43,287) 45,569,393 (15,445,280) 30,124,113 Total liabilities and equity 255,861,166 6,243,884 2,794, , ,038,811 (24,378,121) 240,660,

126 TÜRKİYE İŞ BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARES 43. Earnings per share Basic earnings per share ( EPS ) are calculated by dividing the net income for the period attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period. There is no dilution of shares as at 31 December The following reflects the comprehensive income and share data used in the basic earnings per share computations: Profit available to shareholders 3,759,857 3,688,645 Weighted average number of shares during the year (Million) 112, ,502 Basic earnings per share (full TL per share) Related parties In the course of conducting its banking business, the Group conducted various business transactions with related parties. These include loans, customer accounts, funds borrowed and non-cash transactions. These are all commercial transactions and realised on an arms-length basis. The volumes of related party transactions, outstanding balances at the year end and relating expense and income for the years are as follows: Direct and indirect shareholders Deposits 206, ,420 Interest expense 29,940 45,462 Others Loans and advances 5,714 4,505 Non-cash loans 77,166 71,837 Deposits 45,305 12,564 Trade receivables 19,295 27,461 Trade payables 49,477 47,787 Interest income Interest expense 1,409 (2,546) Fee and commission income Other operating income 18,063 6,227 Other operating expense (190,086) (149,510) Derivative instruments Derivative trading income, net Compensation of key management personnel of the Group The executive and non-executive member of Board of Directors and management received remuneration and fees amounted to TL 81,718 (31 December 2013: TL 74,793) comprising salaries and other short-term benefits. 122

127 TÜRKİYE İŞ BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARES 45. Commitment and contingencies Letters of guarantee 34,649,566 30,615,250 Commitments for credit card expenditure limits 20,489,527 17,679,967 Loan granting commitments 9,956,796 9,186,255 Letters of credit 7,763,406 6,903,157 Commitments for check payments 5,875,007 6,024,383 Acceptance loans 1,229,731 1,494,946 Endorsements and other guarantees 920, ,252 Export commitments 17,932 16,821 Other commitments 6,593,685 8,882,421 Derivative financial instruments held for trading 87,495,717 81,487,452 The Group has forward, swap, option and future transactions as of the reporting date. The Group s derivative transactions predominantly consist of currency swaps, forward foreign currency trading, credit default swaps, currency options and option contracts on securities. The Group has no derivative products that are detached from the host contract. Derivative financial instruments are carried at their fair value at the contract date and re-measured by their prevailing fair value in the following reporting periods. Even though some derivative transactions economically provide risk hedging, since all necessary conditions to be defined as items suitable for financial risk hedging accounting are not met, they are recognised as held for trading purposes within the framework of IAS 39 Financial Instruments: Recognition and Measurement and the profit and loss resulting from such instruments are associated with the income statement. Buy Sell Buy Sell Currency swaps 24,539,669 22,704,772 23,299,465 23,101,940 Interest rate swaps 13,710,176 13,710,176 12,141,730 12,141,730 Currency options 5,488,778 5,454,351 5,816,948 5,798,968 Forward foreign exchange contracts 4,692,452 4,689,703 8,120,142 8,079,044 Interest rate options 718, ,420 1,247,637 1,247,637 Marketable security and index options 21,813 32,704 1,177 1,177 Currency futures ,802 16,276 Other 373,710 1,934,118 79, ,273 49,545,018 49,244,244 50,722,378 50,752,

128 TÜRKİYE İŞ BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARES 45. Commitment and contingencies (continued) Derivative financial instruments held for trading (continued) Asset Liability Asset Liability Interest rate swaps 544,574 (159,503) 300,042 (554,657) Currency swaps 396,077 (449,535) 726,643 (300,620) Interest rate options 21,155 (20,935) 138,927 (148,355) Forward foreign exchange contracts 57,698 (58,528) 121,290 (188,506) Currency options 48,275 (57,509) 1,772 (4,718) Other 13,292 (3,831) 160 (489) Fair value of derivatives 1,081,071 (749,841) 1,288,834 (1,197,345) Derivative assets and liabilities designed as cash flow hedges The Şişecam Group entered into a loan agreement with HSBC London in 27 November 2013 and fixed the interest rates of variable interest rate loans that were denominated in USD along the maturity with the purpose of making the liability position of the companies located in Russia and operating under glass packaging segment compatible with their asset position in terms of currency and hedging the companies against the possible increases in interest rates. Hedging instruments include, interest rate swaps converting floating rate of Libor+2.55% to fixed rate of 9.30% with 3-month intervals for a USD denominated borrowing of USD 70 million and cross currency swaps converting USD denominated capital and interest payables into RUB denominated ones. The fair values of derivatives designed as cash flow hedges are as follows. Fair Value Fair Value Asset Liability Asset Liability Interest rate swaps 84, (4,155) Total derivative assets/(liabilities) held for risk management 84, (4,155) Fiduciary activities The Group provides custody, investment management and advisory services to third parties. Those assets that are held in a fiduciary capacity are not included in the accompanying consolidated financial statements. The Group also manages 96 mutual funds, which were established under the regulations of the Turkish Capital Markets Board (31 December 2013: 97). In accordance with the funds charters, the Group purchases and sells marketable securities on behalf of funds, markets their participation certificates and provides other services in return for a management fee and undertakes management responsibility for their operations. 124

129 TÜRKİYE İŞ BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARES 45. Commitment and contingencies (continued) Commitment and contingencies in the year 2014 Litigation In the normal course of its operations, the Group can be constantly faced with legal disputes, claims and complaints, which in most cases stem from normal insurance operations. The necessary provision, if any, for those cases are provided based on management estimates and professional advice. The total amount of the law suits of Şişecam Group as of 31 December 2014 filed and continuing against is approximately TL 39,171 (31 December 2013: TL 81,322). Şişecam Group has been defendant and plaintiff of more than one case within the ordinary operations during the period. According to the opinions of independent legal and tax advisors, Şişecam Group considers the possibility of incurring loss amounting to TL 39,171 from the cases as remote as of 31 December There is a lawsuit for the cancellation of the license of construction dated 16 July 2008 numbered 1120 given for the Pendorya Mall of TSKB GYO, uncertainties about conclusion of lawsuits prevail as of report date, the Group management does not expect a conclusion that affects financial statements significantly. Put/call option agreements Put/call option agreements were signed between Şişecam Group and European Bank for Reconstruction and Development ( EBRD ) on 24 October 2014 and 10 November Accordingly, Şişecam Group has put option for Paşabahçe Cam San. ve Tic. A.Ş. ( Paşabahçe ) while it has granted a call option to EBRD. If Paşabahçe s public offering occurs until 24 October 2019, related put/call options will be invalid. Considering the agreement terms and future uncertainties, as of the balance sheet date, no liability is recorded in the accompanying consolidated financial statements in relation to the sale of Paşabahçe shares to EBRD. Put/call option agreement was signed between Şişecam Group and International Finance Corporation ( IFC ) on 18 November Accordingly, Şişecam Group has granted a call option to IFC for noncontrolling shares of Soda Sanayii A.Ş. If Soda Sanayii A.Ş. s second public offering occurs in 6 years after the signature date (until 6th anniversary), related call options will be invalid. These conditions will be assessed by the Şişecam Group management each year. Other commitments According to the agreements made among Şişecam Group, Türkiye Petrolleri Anonim Ortaklığı A.Ş., Shell Enerji A.Ş., Mersin O.S.B., Aygaz Doğal Gaz Toptan Satış A.Ş., Boru Hatları and Petrol Taşıma A.Ş. (BOTAŞ) and Eskişehir Organize Sanayii Bölge Müdürlüğü, the Group has a commitment to purchase 1,319,389,646 sm3 of natural gas between 1 January 2014 and 31 December 2015 (31 December 2013: 1,173,950,163 sm3). Government grants Certain expenses regarding industries related to research and development projects which have been certified by expert organizations are reviewed and evaluated so that specific proportion of these expenses are considered as grants and can be refunded within the context of the Decision No: 94/6401 made on the government grants for exporting activities in accordance with the Money Credit Coordination Board s Communiqué No: 98/10 on Research and Development Grants published by the Under Secretariat of Foreign Trade based on the decision No: 98/16 made as at 9 September Exporting activities and other foreign currency generating operations, within the scope of the standards determined by the Ministry of Finance and Undersecretaries of Foreign Trade, are exempt from stamp tax and fees. Government grants are paid to support participating in international fairs in accordance with the decision No: 2004/11 of the Money Credit and Coordination Committee issued at 16 December A memorandum for government incentive was signed between Trakya Glass Bulgaria EAD and Ministry of Economy and Energy on behalf of the Republic of Bulgaria under Regulation of Investment Incentive and Implementation of Bulgaria and Government Incentive Legislation of European Union. 125

130 TÜRKİYE İŞ BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARES 46. Ratings As at and for the year ended 31 December 2014, the Bank s, TSKB s and İş Finansal Kiralama A.Ş. s ratings assigned by international rating agencies are as follows; Türkiye İş Bankası A.Ş. MOODY S 3 June 2014 Rating Outlook (*) Bank Financial Strength D+ Stable Long-term Foreign Currency Deposit Baa3 Negative Long-term Local Currency Deposit Baa3 Negative Short-term Foreign Currency Deposit P-3 -- Short-term Local Currency Deposit P-3 -- FITCH RATINGS 24 June 2014 Rating Outlook (*) Long-term Foreign Currency Issuer Default Rating BBB- Stable Long-term Local Currency Issuer Default Rating BBB- Stable Short-term Foreign Currency Issuer Default Rating F3 -- Short-term Local Currency Issuer Default Rating F3 -- National Long-term Rating AA+ (tur) Stable Viability Rating bbb- -- Support Rating 3 -- STANDARD & POOR'S 11 February 2014 Rating Outlook (*) Long-term Counterparty Credit Rating BB+ Negative Short-term Counterparty Credit Rating B -- Long-term National Scale Rating traa+ -- Short-term National Scale Rating tra-1 -- (*) Stable indicates that the current rating will not be changed in the short term; positive indicates that the current rating is very likely to be upgraded and negative indicates that the current rating is very likely to be downgraded. 126

131 TÜRKİYE İŞ BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARES 46. Ratings (continued) TSKB MOODY S 5 June 2014 Rating Outlook Bank Financial Strength D+ Stable Long-term Foreign Currency Issuer Rating Baa3 Negative Short-term Foreign Currency Issuer Rating P-3 -- Long-term Local Currency Issuer Rating Baa3 Negative Short-term Local Currency Issuer Rating P-3 -- FITCH RATINGS 24 October 2014 Rating Outlook Long-term Foreign Currency Issuer Default Rating BBB- Stable Long-term Local Currency Issuer Default Rating BBB Stable Short-term Foreign Currency Issuer Default Rating F3 -- Short-term Local Currency Issuer Default Rating F3 -- National Rating AAA Stable Support Rating 2 -- Support Rating BBB- - Senior Unsecured Loan Rating BBB- - İş Finansal Kiralama A.Ş. FITCH RATINGS 23 July 2014 Rating Outlook Long-term Foreign Currency Issuer Default Rating BBB- Stable Long-term Local Currency Issuer Default Rating BBB- Stable Short-term Foreign Currency Issuer Default Rating F3 -- Short-term Local Currency Issuer Default Rating F3 -- National Long-term Rating AA+ (tur) Stable Support Rating

132 TÜRKİYE İŞ BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARES 47. Events after the reporting period Explanations regarding issuance of bills and bonds and other borrowings Between 1 January 2015 and the reporting date, Group companies carried out several issues of bills and bonds that are denominated in TL, USD and EURO. Nominal values of TL denominated issues amount to TL 3.8 million with interest rates ranging between 8.41% and 9.90%, and redemption dates between 16 June 2015 and 9 May Nominal values of USD denominated issues amount to USD 1,064.9 million with interest rates ranging between 1.28% and 3.33%, and redemption dates between 7 May 2015 and 22 April Nominal values of EURO denominated issues amount to EURO million with interest rate ranging between 0.89% and 1.24%, and redemption dates between 15 July 2015 and 18 April Between 1 January 2015 and the reporting date, İş Yatırım Menkul Değerler A.Ş. carried out several issues of structured instruments to qualified investors that are denominated in TL. The nominal values of the issues amount to TL 335,505 with interest rates ranging between 8.60% and 33.21%, and redemption dates between 3 February 2015 and 21 August The Parent Bank finalized a Diversified Payment Rights (DPR) securitization transaction with an amount of USD 555 million and the related funds are obtained at 31 March USD 480 million out of the total funding amount has a final maturity of 5 years, USD 60 million has a final maturity of 7 years and USD 15 million has a final maturity of 15 years. On 9 March 2015, İşbank AG has signed a syndicated loan agreement with one-year maturity in two tranches amounting to USD 36.9 million and EURO million. Related loans have interest rates of Libor+0.6% and Euribor+0.6%. Explanations regarding the registered share capital ceiling It was announced within the context of public disclosure dated 30 September 2014 that the Board of Directors of the Bank had decided to increase the paid-in capital of the subsidiary CJSC İşbank to RUB 5,184 million by increasing RUB 3,040 million, and it was also decided to exercise Bank s preferential rights amounting to RUB 3,040 million arising from the capital increase. The amount related to the mentioned preferential rights amounting to RUB 3,040 million was paid on 21 January Other disclosures As per the resolution of the Parent Bank s Ordinary General Meeting held on 31 March 2015, in İstanbul, it was decided to distribute dividend starting from 1 April At 29 April 2015, sale of shares of Avea, held by Group companies (Türkiye İş Bankası A.Ş., Türkiye Şişe ve Cam Fabrikaları A.Ş., Trakya Yatırım Holding A.Ş., Anadolu Hayat Emeklilik A.Ş., Efes Holding A.Ş. and Anadolu Anonim Türk Sigorta Şirketi), to Türk Telekomünikasyon A.Ş. for TL 875 million (TL full) was decided. The sale price will be received approximately in 4.5 years in 6 installments after the share transfer date. 128